Q2 2023 Sun Country Airlines Holdings Inc Earnings Call
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Welcome to the Sun Country Airlines second quarter 2023 earnings call. My name is Josh and I will 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 this session. Please press <unk>.
One one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded.
Now I'd like to 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, David <unk>, President and Chief Financial Officer, and a group of others to help answer your questions before.
Before I 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 upon management's current beliefs expectations and assumptions and are subject to risks.
Actual results may differ materially we encourage you to review the risk factors cautionary statements outlined in our earnings release.
That said.
We assume no obligation to update any forward looking statement you can find our second quarter earnings press release on the Investor Relations portion of the website at IR Dot Dot com with that said I'd like to turn the call over to Jay.
Thank you Chris good morning, everyone.
Our diversified business model is unique in the airline industry due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule flexibility and low fixed cost model will allow us to respond to both predictable leisure demand fluctuations and exogenous industry <unk>.
We believe due to our structural advantages, we will be able to reliably deliver the industry leading profitability throughout all cycles.
A few milestones since our last call that I wanted to highlight first some countries surpassed 1 billion in revenue for the 12 months ending in June our first.
For our 40 year old company.
In <unk>, we carried over a million scheduled service passengers for the first time in any quarter.
We regained our position as the top margin carrier among the 11 carriers for the 12 months ending in the second quarter recall that we were the first into this pilot contract cycle.
In July we executed a record number of flights a day being able to deliver quality operations. During peak days is a key priority for us as we execute our variable capacity model. This growth and performance is a testament to all our frontline employees that deliver for our customers every day.
Consistent with the theme of the last several calls we remain in an environment where demand across all our segments is strong.
As it's been a common topic around the industry I wanted to give some color on the revenue environment for our scheduled business. Our second quarter scheduled service <unk> was up 10% year on year on ASM growth of 6% certainly very positive results, we expect to be able to accelerate scheduled service ASM.
Growth ended the third quarter to mid teens, and we expect <unk> to be down slightly year on year. However, I want to point out that scheduled service <unk> 2019 was up in <unk> by 34% and 43%, respectively. We expect <unk> to fall between those bounds.
We're seeing unit revenues stabilize at a substantially higher level versus pre COVID-19 levels. This reset seems to be persistent based on sales into our selling schedule currently out through April 2020 for Minneapolis by far our largest market has been particularly robust through the COVID-19 recovery. This.
Summer, we launched 15, new markets all are performing well since I've been at Sun country. We Havent had any MSP markets that didn't have a positive contribution that's pretty amazing.
One thing I'd like to call out as future cash flow. This year will produce about 50% more flights that were performed in 2019 and two years I expect departures to grow versus this year by over 30%. We can produce those growth figures with the addition of only three net aircraft to the fleet.
At about a $60 million cost.
Along with the re delivery of our nine hundreds currently leased out.
All three of the expected deliveries already have committed financing.
This free cash flow gives us the confidence in executing on the share buyback recently approved by our board.
And with that I'll turn it over to Dave.
Thanks Jude.
Q2 was a historically strong quarter for Sun country, despite it being among the seasonally weaker quarters for our business total revenue increased 19, 2% year over year to $261 $1 million, while earnings before taxes were $26 $8 million versus a loss of $4 8 million in Q2 of 2002.
'twenty two.
Op margin was 15, 3% for the quarter revenue earnings and margin results were historically record highs for the second quarter.
Revenue from our passenger business continued to stay strong in Q2, increasing 16, 6% year over year to $227 $9 million.
Scheduled service plus ancillary sales generated $178 $2 million in revenue, which was $16, 8% higher than last year.
This easily exceeded a five 6% growth in scheduled service ASM was driven by a two 7% growth in total fair to $177 and a two point increase in load factor to 85, 8%.
Scheduled service transom grew 10, 3% versus Q2 of last year.
Since the second quarter of last year, we've seen a significant sustained increase in our scheduled service <unk> versus pre COVID-19 levels. We believe this is driven by the continued optimization of our network and changes in the public's demand for leisure travel.
As Jude mentioned during Q2, our scheduled service travel was up 43% versus 2019.
In Q3 of this year, we expect scheduled service <unk> to be up at least 35% versus Q3 of 19, we don't see any sign of scheduled service traffic numbers returning to pre COVID-19 levels, rather they appear to be stabilizing at the higher levels. We are now experiencing.
Charter revenue in the second quarter grew by 16, 1% to $49 $6 million and block hour growth of 23, 9%.
A portion of our charter revenue consists of reimbursement from customers for changes in fuel prices as we do not take fuel risks on our charter flying.
Q2 fuel prices dropped by over 38% versus last year.
You exclude the fuel reimbursement revenue from both Q2 of 'twenty three in Q2 of 'twenty. Two charter revenue grew 33, 6% over the period and charter revenue per block hour grew by 8%.
Program Charter flying was 87% of total charter block hours versus 92% in Q2 of last year.
Continue to pursue more AD hoc business as our available capacity increases.
Second quarter cargo revenue grew 18, 1% to $25 million on a 10, 4% increase in block hours.
Last year, we had lower levels of flying due to scheduled maintenance events and the annual increases in our Amazon contract occurred in December of 2022.
We expect year over year aggregate growth to peak in Q3 and moderate thereafter, we're expecting full year 2023 block hour growth to be in the high single digit range as always our unique model allows us timber with cast capacity between lines of business as conditions warrant.
Now, let me turn now to costs.
Operating expenses increased four 5% an 11, 3% increase in total block hours for the second quarter.
Adjusted CASM was up 10, 4% versus Q2 of 'twenty two.
This compares to a 14% increase in the year over year comparison for Q1, we expect year over year CASM growth to continue to moderate in the quarters ahead Dale.
Daily aircraft utilization was still nine 5% lower year over year, which continues to put pressure on unit costs.
Total non fuel operating costs increased by approximately 25% versus Q2 of last year.
Significant drivers of this increase include the aircraft ownership costs for the $5 737, nine hundreds we currently leased to Oman Air.
As well as non repeating costs for the vesting of management stock options and a payment to one of our labor groups to settle past grievances.
Excluding these expenses non fuel operating costs would have increased by 19, 8% year over year.
Fuel expense decreased 32% versus last year.
Regarding our balance sheet, our total liquidity at the end of Q2 was $263 million, which was slightly higher than the amount at the end of Q1.
Year to date through July we spent $210 million on Capex, which is funded the majority of our planned aircraft growth into 2025.
We expect to be able to achieve our growth objectives over the next two years with higher aircraft utilization and the addition of only three net aircraft.
As a result, we're expecting capex to decline considerably in 'twenty, four and 'twenty five.
Our net debt to adjusted EBITDA ratio at the end of Q2 was 2.3.
Since we do not have a significant debt burden, we have flexibility in how we deploy our cash.
Since Q4 of last year, we spent 43 $47 $3 million on share repurchases.
Our board has authorized another $30 million in repurchase authority, which brings our current available share repurchase authority to $32 $8 million.
Turning now to guidance, we are anticipating Q3 total revenue between to be between $240 and $250 million.
An increase of 8% to 13% versus Q2 of 'twenty two on a block hour increase of 13% to 16%.
We're forecasting a $2 90 per gallon fuel price in the quarter operating margin for the quarter is forecasted to be between six and 11%.
The fundamentals of our unique diversified business remains strong and our model is highly resilient to changes in macroeconomic conditions, our focus remains on profitable growth and with that we will open it up for questions.
Thank you.
Minder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for questions.
Our first question comes from Duane <unk> with Evercore ISI you May proceed.
Okay.
Hey, good morning.
Just on <unk>.
Charter can you can you talk a little bit and just remind us how fuel change year over year impacts.
Revenue trends in charter and also margins and charter.
So.
I think it's important to break out what charter includes there is edge there are several track programs.
We have a fleet of 60 aircraft five of our dedicated to track programs plus a VIP says basically six aircrafts and those have absolutely pass through and teal.
We have.
A significant amount of AD hoc business.
That is predominantly sports programs again that is 100% pass through sometimes however, we need to position aircraft that are costs.
So theres a little bit of.
Flying that we do in support of those that has.
Feel at risk.
And then there is the military business, which is 100% pass through so it's effectively.
Over 90%.
Perfect pass through yes, I mean think of it this way Duane So we negotiated charter contract and that charter contract as a reference price. Okay. If fuel is higher or lower than that reference price, we get reimbursed from the charter customer for either more or less based on the based on the fuel price when fuel is really.
Hi, the reimbursement is higher so the revenue looks higher when fuel is really low the reimbursement is less so the revenue looks less.
Got it.
And then for.
For some of the seasonal flying that you do can you can you just remind us to what extent, Mexico or Ken Kun.
As a part of that seasonal set.
We heard some.
More cautious comments on Ken Kun, specifically from spirit yesterday, but could you just kind of comment on your trends to maybe Mexico and near Caribbean.
Yes ill give you some backdrop.
Our international network.
His focus from Minneapolis in the wintertime.
And in the summertime the predominance of our international network is focused on origination and southern large markets.
The distinction there is that the southern business is largely scraping business, where we don't support that flying with a lot of marketing we're not focused on building a brand and some of these origination markets. In contrast to what we do out of Minneapolis in the wintertime.
And therefore.
Little more subject in the summer time to the prevailing airfare and some of these international markets.
And that would be.
I agree with Ted's comments about some of the weakness.
That we're seeing in southern markets, but these are still highly profitable markets for us and we have the ability to dial capacity to whatever optimal level is supported by the fare environment at that given time.
Most of our international markets in the summer time are now winding down and will be will be out of by the end of August and then we will focus on building up our.
Largely Minneapolis, but also some Milwaukee and a few others, where we fly at winter markets as we approach into the fourth quarter.
Any color grant.
Yes.
Just to Echo <unk> comments that there was a little pressure this year.
The results were down on an absolute basis, we're still acceptable for us down for maybe what we've experienced but we do some unique things down there. There is one market that has been particularly strong for us which is Harlan Gen, which did not have sort of the competitive impacts in that one performed very nicely. So jude's point, our agility will.
At work, we've been there for a while and it's going to be something we continue to do in the summer my diagnosis of Cancun was that it was a really strong summer in 'twenty, two and a lot of carriers chase that demand into this summer and if you look at capacity levels year on year.
Cancun was the beneficiary of a lot of capacity growth and that drove down fares I think there is still strong structural demand than we can as I've mentioned fly in any environment and be successful.
Okay. It makes sense I'm going to have to look up.
That originating market. Thank you.
Go look at my map.
Got it I appreciate it I appreciate the thoughts.
Okay.
Thank you.
One moment for questions.
Our next question comes from Catherine O'brien with Goldman Sachs. You May proceed.
Hey, good morning, everyone. Thanks, so much for the time.
Okay.
Hey.
Another topic that's from popular.
Got it.
Domestic carriers, having to rightsize day a week.
Based on their current view on on.
Aware, where corporate now that's not that that's a market you Keith but.
I know Youre in network has less overlap with some of these carriers, but have you started to see any pickup in competitive capacity into the fall or early winter.
As <unk> starts to take place in other airline schedule.
Generally the capacity environment is constructive meaning not a lot of growth.
We're seeing some build backs into Minneapolis based on 2019 levels stuff that was cut that's coming back from.
Non delta carriers.
And so.
But that's perfectly fine on the day of week stuff I mean, that's sort of what we do.
And I don't think it should be a surprise to anybody that Vegas is a little weaker on tuesdays than it is on weekend demand patterns.
We built the business around that it's not a substantial change here is there is a point that I can bring up which is perhaps out of consensus.
July doesn't have a lot of day of week sensitivity. There is a tremendous amount of demand, but it's elastic.
As compared to March which has these fantastic days, so theres really deep demand is inelastic on a few given days, particularly around spring break travel patterns.
So July we need to be a lot bigger than we were.
And that means adding into off peak periods. So we have a capacity constraint. It's a block hour constraint based on pilot availability and so we choose to put our flying on the very best of days during that month.
However, if we had more flying we would expand and flattened the schedule with a relatively moderate.
Or de Minimis even.
The reduction in unit revenues, because the off peak days are so powerful.
In contrast September is completely different and as it always has been.
Not a lot of midweek opportunities in September and I agree with the overall sentiment that there is.
Our focus our renewed focus perhaps from the big three onto leisure demand, which is crowding out somewhat.
Leisure carriers when there is.
Limited demand but.
But we already focus on flying around those limited demand periods and so for us, it's really about adding into off peak periods. During peak months. So it's a more nuanced and complicated matter I think then the market is making.
Or at this point.
Our opportunity is to grow into these 40% variable contribution scheduled service.
Networks that we have during peak months and Thats, what gets our third quarter margins up into the mid teens from where they are today at this fuel price.
Got it that's really helpful. Thanks for the perspective.
Maybe Jeff.
Yes.
Two quick ones on costs for Dave.
So.
<unk>.
Just coming back to the CASM commentary through year end that he says can you just give us some more color on that.
Ratable like with the step down in each quarter or anything we should be aware of an unfortunate capacity growth and then and then just on the share based comp.
In the press release.
A one off investing in stock comp, but <unk> wasn't too far below this quarter.
Both are a little bit elevated last year.
Give us some color on how we should put that to try and just something outside of your commentary I'll caveat. Thanks, so much.
Yes sure so.
Essentially I think I think what what this is consistent with <unk> commentary is we're a little bit oversized.
We mentioned on the aircraft front, we have enough aircraft.
A few more to really sustain.
On a reasonable growth levels through 2025, so we're a little oversized and as we continue and thats negatively impacting.
CASM.
As we sort of roll forward into the quarters ahead.
And you see some of this growth, particularly like some of the third quarter growth and then some growth we're going to have in the fourth quarter as well as year over year numbers will begin to we'll continue to I should say moderate.
We should be single digit kind of stuff in the third quarter and fourth quarter I'm, not giving guidance on yet, but we should just continue the improving year over year trends here on the CASM front.
Regarding the management options.
There was there were a number of folks here, who had considerable options from Apollo when we when the original acquisition was made.
Apollo's ownership, which I think is an important point for investors has continued to drop and is now sub 30% at the company. So the overhang is getting less and less but that 30% was a sort of a trigger for divesting of management options that happened last quarter. So when we fell below that number.
<unk>.
A significant number of management options vested.
So those those original options are now fully vested so vesting costs will not continue to recur in the quarters ahead at least for those for those options. So that number will will moderate.
Okay, great. Thanks, so much Steve.
Thank you.
One moment for questions.
Our next question comes from Helane Becker with TD Cowen you May proceed.
Alright, Thanks very much this is Tom Fitzgerald on for Helane.
My question is just on what Youre seeing in terms of pilot attrition.
How you are feeling about getting first officers to upgrade into the captain's seat I. Appreciate any color you can have thanks very much.
I'll make some general comments and then Greg if you want to jump in well, we don't have any problem hiring pilots in our attrition is consistently below where we had expected it would be at this time.
The issue boils down really to getting pilots to upgrade to captain so were constrained in the left seat.
We.
We continue to make strides in improving that vigor and as we will grow as we upgrade Kathryn.
Yes.
To <unk> point, we don't have a problem hiring pilots right now we've got really robust applications. We've got a great recruiting team on the attrition front.
We watch that daily that stayed within our expectations. We see these other deals that are going on out there now that might affect that attrition.
But we believe we can moderate that with additional class sizes that we can fill it.
<unk> said, it really does come down to our ability to grow is that the rate of our cabin upgrades.
As an industry wide issue as these.
And in the case of the Big three they did a bunch of early retirement, so everybody is trying to.
Get pilot training pipeline.
Rightsize their pilot groups is taking a little time, yes, I think one of the points as we've talked about at this point for now a number of quarters.
This continues to be a challenge for us, but I think you I think you can.
Look at the growth that we're looking at here in the third quarter is a testament to the fact that we are making progress, but it's it's not linear it's bumpy and this is the this is it.
The focus.
Okay.
Thank you.
And as a reminder to ask a question. Please press star one on your telephone.
One moment for questions.
Our next question comes from Mike Lindenberg with Deutsche Bank You May proceed.
Oh, Hey, good morning, everyone I did get on a few minutes late.
I apologize if you may have addressed this but just.
Going from a 15% operating margin Youre guiding 6% to 11, we're coming off of what was one of our seasonally one of your weaker quarters.
The primary drivers there is it is it is it things like fuel.
I know September is a tough month for you guys can you just run through some of the puts and takes.
Youre thinking behind that diesel in profitability.
Thanks.
I mean, the main thing is.
Segmented capacity allocation.
So we have very consistent profitability from our track and cargo programs track charter and cargo programs.
And.
It's a good thing that they.
In many ways. It's a good thing that they are flat and capacity.
And then we have <unk>.
Scheduled service, which is variable and as I mentioned and Dave alluded to we're flying our airplanes in July one of the strongest demand months of the year at about eight hours a day and that number should be 10 11.
Those are 40% incremental margin opportunities that were that were cutting out.
Because of capacity constraints that don't have anything to do with it with opportunity or airplanes, it's really about staffing.
So that's the biggest thing in contrast, the second quarter is relatively flat demand period as compared to the third quarter, So third quarter.
In the third quarter goes in July .
In contrast, the second quarter has really good April it really good June may is not great, but it's not that bad is not as bad as September so it's a lot more flat.
And that's the difference in the two quarters.
Makes sense.
Did you mentioned, what your <unk> will be up scheduled ASM in the.
September quarter.
We didn't mention that.
I don't think we have an issue sharing and I just don't have it in front of me, we can get it to you.
I got it at about mid teens.
Okay.
Okay and then just my last question and this is more of a modeling question as we think about the rental revenue the $6 million.
Is that sort of the right quarterly run rate and when does that start to fade out what does it sometime late $2004 25, thanks for taking my questions.
Yes, that's right.
Fade out will begin really in November 2024.
And then continue through November 2025 is the five aircrafts will roll off and come to us to operate.
Okay.
Yes.
Thank you.
One moment for our questions.
Our next question comes from Christopher set the locals with Susquehanna Investment Group you May proceed.
Good morning, everyone, who wanted to get back to.
Comment you made on.
I believe you said that the stock comp should be moderating given the changes in the vesting schedule. So could you help frame the implied up.
Operating income for <unk>.
How should we think about.
Stock comp there and believe this quarter was a little north of 15% that's a significant step up from recent quarters.
Just wanted to better understand how we should think about that.
Underlying as we think about the second.
Second half of the year. Thank you.
Yes, I don't have that precise number in front of me it'll just be a significant step down I mean in the second quarter.
There was a significant chunk of options that had not yet vested they all invested in one quarter.
So there'll be a step down number I just don't have that.
In front of me as it pertains to the 2018 option grant that was associated with the Apollo transaction.
All of those options are either vested or.
Done.
So that goes to zero, yeah. So exactly so that number goes to zero and as with any other company. We have an RSV program, which is ongoing so there'll be some stock up some stock comp expense that continues just at a significantly lower level.
Okay.
The second question. So I think you are backing out the DNA associated with these five dry leases from your CASM X could you just walk us through.
The rationale why I'm guessing because they don't have associated ASM.
But you are including the revenue side of it and then also as those come off I think you said dry leases in 2025.
Just kind of walk us through how we should think about.
The unit cost impact where unit margin just wanted to kind of better understand this relationship here sitting in revenue here, but it looks like it's coming out of your CASM.
Yes.
Yes, yes.
It's sitting in revenue and it's sitting in expense in our financials, but since as you pointed out it doesn't generate any ASM, we take it out of the CASM comp and it's out of the <unk> pump.
So it's out of unit costs on the revenue side and on the cost side.
<unk>.
In the same way that our cargo revenue isn't.
And.
And our cost per ASM or revenue per ASM number of them generate ASM.
This strategically I want to just reiterate from last quarter were not being a lessor, we're just acquiring airplanes.
For future delivery so.
When we report.
Doing our best to back out all those results. So that you can kind of see the underlying success of the business, which what we care about.
Okay, one more yeah, I'm, sorry got it.
Wanted to follow up if I just pulled the number so.
Stock comp in the second quarter, I think is around four and a half that number of probably dropped to $1 million plus or minus.
For <unk> or <unk>.
Through the second half.
Now for <unk>.
Okay, great. Thanks, and then just if I could get in one more here. So we've heard from.
U S peers talking about how the strong international travel is pulling from a pool of what would be domestic travelers and are you seeing any of that and if so what are your thoughts on when that might.
So thank you.
Okay.
Okay.
I mean, my view is that we observe.
Something and then try to make up a reason why it exists.
So it's true that the trans Atlantic.
Yields are much higher than they had been I think it's a stretch to say that those folks that are flying trans Atlantic would've otherwise flown domestic.
Think more confidently, we can say summer of 'twenty, two was an outlier and demand recovery with a lot of recapture from the previous year's instead, we're going down to a fairly consistent year over for unit revenue environment month by month, where.
Improvements are between 35 and 45%.
And that seems consistent going into all of the bookings we're seeing through the spring of next year.
So I think it is a little much to draw that conclusion, but.
I think.
What gets me excited is just.
It looks like <unk> sort of permanently reset into into a post COVID-19 environment for for our network anyway.
Anything else Greg.
I would just add to that that those unit revenues versus 19, I think we're at the high end of that so thats specific to us and a testament to the good job. This team has done.
And I also think.
Jude comments are spot on if you look at our network. We grew Jude mentioned 15, new markets. This summer they've all met expectations our load factors are up so.
We saw strong strong demand across.
Our network and really happy with the results.
Okay. Thank you.
Thank you I'd now like to turn the call back over to Jude Bricker for any closing remarks.
Thanks for joining us thanks for your interest in Sun country, and we'll talk to you again at the end of the next quarter.
Morning, everybody.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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