Q2 2024 Sun Country Airlines Holdings Inc Earnings Call

August 2, 2024

Okay.

Crystal: Welcome to the Sun Country Airlines second quarter 2024 earnings call. My name is Crystal and I'll be your operator for today's call.

Operator: Welcome to the Sun Country Airlines second quarter 2024 earnings call. My name is Crystal, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, this call will be recorded. I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Crystal: At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

Speaker Change: As a reminder, this call will be recorded I would now.

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

Chris Allen: 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'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements that are based upon a manager's current beliefs, expectations, and assumptions, or are subject to risk and uncertainty. However, actual results may differ materially.

Chris Allen: Thank you I'm joined today by Jude Bricker, our Chief Executive Officer, Nate Davis, President and Chief Financial Officer, Andy Griffith bothered to help answer your questions before we begin I'd like to remind everyone that during this call. The company may make certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions are subject to risks and uncertainties actual result.

Chris Allen: May differ materially we encourage you to review our risk factors and cautionary statements outlined in our earnings release on our most.

Chris Allen: We encourage you to review our 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 statements. You can find our second quarter 2024 earnings press release on the investor relations website at ir.suncountry.com. With that said, I'd now like to turn the call over to Jude.

Chris Allen: And our most recent SEC filings, we assume no obligation to update any forward looking statements you can fire second quarter 'twenty 'twenty four earnings press release on the Investor Relations.

Chris Allen: IR Dot Sun country Dot com with that said I'd now like to turn the call over to Julian Thanks, Chris Good morning, everyone.

Jude Bricker: Thanks, Chris. Good morning, everyone. Our diversified business model is unique in the area.

Julian: Our diversified business model is unique in the airline industry due to the predictability of our charter and cargo businesses, we're able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule flexibility and low fixed cost model allows us to respond to both predictable leisure demand fluctuations and <unk>.

Chris Allen: This industry shocks.

Chris Allen: We believe due to our structural advantages will be able to reliably deliver industry, leading profitability throughout all cycles.

unknown: [inaudible]

Speaker Change: I wanted to start by acknowledging our employees that have worked so hard through this challenging summer in both June and July we'd grown scheduled service departures in excess of 15% year on year, while facing some extended aircraft out of service events and an outage at temporary disable the key operational system our employees like usual.

unknown: and others will be able to reliably deliver industry-leading profitability throughout our site.

Jude Bricker: I want to start by acknowledging our employees who have worked so hard through this challenging summer. In both June and July, we grew scheduled service departures by more than 15% year-on-year while facing some extended aircraft out-of-service events and an IT outage that temporarily disabled the key operational systems. Our employees, like usual, delivered for our customers, and I'm personally grateful.

Speaker Change: Delivered for our customers and I'm personally grateful.

Speaker Change: There's been a lot of discussion about overcapacity in our industry for us in our key market of Minneapolis. The domestic seat growth rate peaked in July and subsides, the rest of the year and into next spring.

Jude Bricker: There's been a lot of discussion about overcapacity in our industry. For us, in our key market of Minneapolis, the domestic seed growth rate peaked in July and then slowed through the rest of the year and into the next spring. As such, we expect lessening fare pressure as we move through the year. It's encouraging to see the industry move aggressively to right-size schedules. Our reaction to changes in the market environment will always be to adjust capacity.

Speaker Change: We expect lessening fare pressure as we move through the year, it's encouraging to see the industry move aggressively to rightsize schedules are reaction to changes in market environment will always be to adjust capacity. Our July Minneapolis seats were up 29% year on year by September our seats will be down 9%.

Jude Bricker: Our July Minneapolis seats were up 29% year-on-year. By September, our seats will be down 9% year-on-year. July's scheduled service volume will be two and a quarter times larger than September, with September always being the most challenging month for leisure demand.

Speaker Change: Year on year July scheduled service volume will be two and a quarter times larger than September September always being the most challenging month for leisure demand as already announced we will move capacity aggressively into our other segments charter and cargo we still expect a strong winter season for leisure and are planning mid single digit capacity.

Jude Bricker: As already announced, we will move capacity aggressively into our other segments, charter and cargo. We still expect a strong winter season for leisure and are planning mid single-digit capacity growth for our peak winter. I want to point out that June and July continue to be strong demand months for our scheduled service product. We sold loads in excess of 85% during both months with unit revenues up nearly 20% versus pre-COVID comps, even considering our growth.

Speaker Change: Growth for our peak upcoming winter I want to point out that June and July continued to be strong demand months for our scheduled service product. We had sold loads in excess of 85% during both months with unit revenues up nearly 20% versus pre COVID-19 costs, even considering our growth our ability to manage our peak capacity, while maintaining our unit cost.

Jude Bricker: Our ability to manage our peak capacity while maintaining our unit cost advantage mostly explains the outperformance of our scheduled business as compared to other domestic leisure carriers. In cargo, we have contractual growth along with rate improvements through the end of 2025.

Speaker Change: Advantage, mostly explains the outperformance of our scheduled business as compared to other domestic leisure carriers and cargo we have contractual growth along with rate improvements through the end of 2025 for charter while volumes were generally flat, we've been able to manage to higher margins as we adjust our pre COVID-19 long term.

Jude Bricker: While volumes were generally flat, we've been able to manage higher margins as we adjust our pre-COVID processes.

Jude Bricker: Long-Term Contracts to the New Cost Environment. As mentioned before, we have fleet expansion plans to 71 aircraft from our current in-service fleet of 56. All this growth will come from our leased-out fleet, 7 aircraft, and from committed cargo deliveries, 8 aircraft. In both cases, this growth won't require additional CAPEX. So, we expect to continue to deliver high free cash flow yields in

Speaker Change: Contracts to the new cost environment.

Speaker Change: As mentioned before we have fleet expansion plans to 71 aircraft from our current in service fleet of 56, all of this growth will come from our leased out fleet seven aircraft and from committed cargo deliveries eight aircraft in both cases this growth will require additional capex. So we expect to continue to deliver high free cash flow yields.

Jude Bricker: Cash Flow Yields in the Near Midterm. And with that, I'll turn it over to Dave.

In the near mid term and with that I'll turn it over to Dave.

Thanks, Jude we're pleased to report that Q2 was our eighth consecutive quarter of profitability and that through the first half of 2020 for Sun country was the most profitable airline in the U S.

Dave Davis: Thanks, Jude. We're pleased to report that Q2 was our eighth consecutive quarter of profitability and that through the first half of 2024, Sun Country was the most profitable airline in the US. This is despite the fact that, unlike for most other carriers, Q2 is a seasonally slower quarter for Sun Country. The domestic revenue environment continues to be impacted by overcapacity, and the resulting impact on fares is at domestic-focused LCCs, the hardest. Our resilient business model has allowed us to remain profitable because of the diversity of our revenues.

Speaker Change: This is despite the fact that unlike for most other carriers Q2 is a seasonally slower quarter for Sun country.

Speaker Change: The domestic revenue environment continues to be impacted by overcapacity, and the resulting impact on fares as a domestic focused lcc's. The hardest our resilient business model has allowed us to remain profitable because of the diversity of our revenue streams.

Dave Davis: As we move through the third quarter, we are slowing scheduled capacity growth. While our model allows us to make tactical capacity allocation decisions quickly, large moves require several quarters to execute. As we mentioned during our announcement of our revised agreement with Amazon, Sun Country's cargo segment will become a larger portion of our business starting in mid-2025.

Speaker Change: As we move through the third quarter, we are slowing scheduled capacity growth, while our model allows us to make tactical capacity allocation decisions quickly large moves require several quarters to execute.

Speaker Change: As we mentioned during our announcement of our revised agreement with Amazon. Some countries cargo segment will become a larger portion of our business starting in mid 2025 by.

Dave Davis: By 2026, we expect revenue from our cargo segment to be almost 20% of our total revenue versus approximately 10% in 2024. The expansion of our cargo segment comes with almost no required CapEx and drives improved profitability and greater free cash flow. This is the essence of the Sun Country business model. Now, I will turn to the specifics of the second quarter.

By 2026, we expect revenue from our cargo segment to be almost 20% of our total revenue versus approximately 10% in 2024.

Speaker Change: The expansion of our cargo segment comes with almost no required capex and drives improved profitability and greater free cash flow. This is the essence of the Sun country business model.

Speaker Change: Let me now turn to the specifics of the second quarter.

Dave Davis: First, revenue and capacity. In the second quarter, total revenue declined 2.6% versus the second quarter of 2023 to $254.4 million. For our passenger segment, which includes our scheduled service and charter businesses, total revenue fell 5% year over year. Scheduled Service revenue declined 7.2%, driven by a 21.3% decline in scheduled service TRASM and an 18.2% increase in ASM. Clearly, we flew more during off-peak periods than the demand environment could support. In addition, we were impacted by late June operational challenges in MSP that reduced passenger revenue by between a million and 1.5 million.

Speaker Change: First our revenue and capacity in the second quarter total revenue declined two 6% versus the second quarter of 2023 to $254 4 million.

Speaker Change: For our passenger segment, which includes our scheduled service in charter businesses total revenue fell 5% year over year.

Speaker Change: Scheduled service revenue declined seven 2% driven by a 21, 3% decline in scheduled service <unk> and an 18, 2% increase in ASM.

Speaker Change: Clearly we flew more during off peak periods in the demand environment could support.

Speaker Change: In addition, we were impacted by late June operational challenges and MSP that reduced passenger revenue by between 1 million and $1 5 million.

Dave Davis: In response to the soft demand environment, we're curtailing our growth in the third quarter and expect scheduled service ASMs to be up 7 to 8% year over year versus roughly 15% we were originally planning. We expect year over year growth to fall further in Q4. The pulldown comes mainly from reducing off-peak flying.

Speaker Change: In response to the soft demand environment, we are curtailing our growth in the third quarter and expect scheduled service ASM to be up 7% to 8% year over year versus roughly 15%. We were originally planning.

Speaker Change: We expect year over year growth to fall further in Q4.

Speaker Change: The pull down comes mainly from reducing off peak flying scheduled service ASM for a full network will still grow in July by about 16% year over year, but by September they will shrink by 11%.

Dave Davis: Scheduled service ASMs for our full network will still grow in July by about 16% year over year, but by September they will shrink by 11%. The average total fare per passenger fell by 20.1% during the quarter. While total fare has declined versus last year, the second quarter was the first since COVID that we flew more ASMs in the second quarter of 2019, and Q2-24 scheduled service TRASM was 12.3% higher than Q2-19. Charter revenue in the second quarter grew 2.8% to $51 million, which was a new quarterly high.

Speaker Change: Average total fair per passenger fell by 21% during the quarter.

Speaker Change: While total ferrous declined versus last year. The second quarter was the first since COVID-19 that we flew more ASM in the second quarter of 2019, and Q2 'twenty four scheduled service <unk> was 12, 3% higher than Q2 of <unk> 19.

Speaker Change: Charter revenue in the second quarter grew two 8% to $51 million, which was a new quarterly high.

Speaker Change: This result was even more impressive as second quarter charter block hours declined 10, 2% year over year due to scheduling improvements, which reduced the number of fairy flights we operated.

Dave Davis: This result was even more impressive as second quarter charter block hours declined 10.2% year over year due to scheduling improvements, which reduced the number of ferry flights we operated. Ad Hoc Charter Revenue grew significantly versus last year and was 23% of the total charter revenue versus 13% in the second quarter of last year. For our cargo segment, revenue grew by 1.7% to $25.4 million on a 2.4% decrease in block hours. Cargo block hours are influenced by scheduled heavy maintenance events, which drive moderate changes in aircraft availability.

Speaker Change: AD hoc charter revenue grew significantly versus last year and was 23% of the total charter revenue versus 13% in the second quarter of last year.

Speaker Change: For our cargo segment revenue grew by one 7% to $25 $4 million on a two 4% decrease in block hours.

Dave Davis: We expect year over year cargo block hours to grow in both the third and fourth quarter of this year and then to inflect sharply upward in 2025, as we take on an expected eight additional freighter aircraft throughout the year. June was the first month that a portion of the revised Amazon contract rates went into effect. The full impact of the new rates will not be in effect until the second half of 2025.

Speaker Change: Cargo block hours are influenced by scheduled heavy maintenance events, which drive moderate changes in aircraft availability, we expect year over year cargo block hours to grow in both the third and fourth quarter of this year and then to inflect sharply upward in 2025 as we take an unexpected eight additional freighter aircraft throughout the year.

Speaker Change: June was the first month that a portion of the revised Amazon contract rates went into effect.

Speaker Change: The full impact of the new rates will not be in effect until the second half of 2025.

Speaker Change: Turning now to costs.

Dave Davis: Turning now to cost, second quarter total operating expenses increased 7.3% on an 8.9% increase in total block hours. Chasm declined by 5.1% versus the second quarter of 2023, while adjusted chasm declined 4.9%, marking our third consecutive quarter of year-over-year decline. As our pilot availability issues have eased, we've been able to grow flying through higher aircraft utilization, which was seven and a half hours per day in the second quarter, up 11.9% versus the second quarter of last year.

Speaker Change: Second quarter total operating expenses increased seven 3% on an eight 9% increase in total block hours.

Speaker Change: CASM declined by five 1% versus the second quarter of 2023, while adjusted CASM declined four 9%, marking our third consecutive quarter of year over year declines.

Speaker Change: As our pilot availability issues have eased we've been able to grow flying through higher aircraft utilization, which was seven five hours per day in the second quarter up 11, 9% versus the second quarter of last year.

Speaker Change: Our declining CASM came despite increases in both brown handling costs and higher airport fees ground handling expenses grew by 16, 6% year over year, driven by a 20% increase in scheduled service departures, while the roll off of Covid relief payments that airports had been using to minimize rate increases contributed.

Dave Davis: Our declining chasm came despite increases in both ground handling costs and higher airport fees. Ground handling expenses grew by 16.6% year over year, driven by a 20% increase in scheduled service departures, while the roll-off of COVID relief payments that airports had been using to minimize rate increases contributed to a 14.9% increase in landing fees and airport rent. As we move into Q3, the slowing growth in our scheduled service business is likely to result in an increase in adjusted CAS.

Speaker Change: Two a 14, 9% increase in landing fees and airport rent expenses.

Speaker Change: As we move into Q3, the slowing growth in our scheduled service business is likely to result in an increase in adjusted CASM.

Speaker Change: Regarding our balance sheet, our total liquidity at the end of the second quarter was $153 million year to date, we spent $38 2 million on Capex at this point, we do not need to purchase any incremental aircraft until we began looking for 2027 capacity we.

Dave Davis: Regarding our balance sheet, our total liquidity at the end of the second quarter was $153 million. Year-to-date, we've spent $38.2 million on CapEx. At this point, we do not need to purchase any additional aircraft until we begin looking for 2027 capacity. We continue to generate strong free cash flow, and we still anticipate full year 2024 CapEx to be well below $100 million. Our leverage remains low, with our net debt to adjusted EBITDA ratio at the end of the second quarter at 2.6 times. Finally, the effective income tax rate increased substantially during the three months ended June 30, 2024 as compared with the prior year due to some additional tax expense related to stock compensation.

Speaker Change: We continue to generate strong free cash flow and we still anticipate full year 2020 for capex to be well below $100 million.

Speaker Change: Our leverage remains low with our net debt to adjusted EBITDA ratio at the end of the second quarter at two six times.

Speaker Change: Finally, the effective income tax rate increased substantially during the three months ended June 32024, as compared with the prior year due to some additional tax expense related to stock compensation.

Dave Davis: Turning to our guidance, we expect third quarter total revenue to be between $245 million and $255 million on block hour growth of 5 to 8 percent. We're anticipating our cost per gallon for fuel to be $2.82, and for us to achieve an operating margin between 3% and 5%. Our business is built for resiliency and will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, I'll open it up to questions.

Speaker Change: Turning to our guidance, we expect second quarter total rep, sorry, third quarter total revenue to be between $245 and $255 million on block hour growth of 5% to 8%.

Speaker Change: We're anticipating our cost per gallon for fuel to be $2 82.

Speaker Change: And for us to achieve an operating margin between three and 5%.

Speaker Change: Our business is built for resiliency and will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility.

Speaker Change: I'll open it up for questions.

Speaker Change: Thank you.

Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question will come from Ravi Shanker from Morgan Stanley. Your line is now open. Good morning.

Speaker Change: As a reminder to ask a question.

Speaker Change: One on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

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

Speaker Change: And our first question will come from Ravi Shanker from Morgan Stanley. Your line is now open.

Ravi Shanker: Thanks, good morning everyone. So, big capacity cuts in the back half that is good to see from an overall industry perspective, but given your unique model and the ability to move around resources, is there anything you guys can do to reallocate those resources to kind of offset the impact on cash?

Ravi Shanker: Thanks, Good morning, everyone.

Speaker Change: So make capacity cuts in the back half, but it was good to see from an overall industry perspective.

Speaker Change: Given your unique model.

Speaker Change: Our ability to move around resources kind of is there anything you guys can do to reallocate those resources to kind of offset the impact on CASM.

Unknown Executive: Probably in the second half of the year. To some extent, the answer to that is yes, but probably not fully. We've been consistently coming in favorable to our cost projections, and the company's done a great job on that front. Just given the sort of pull-down that we've done fairly recently, we'll be able to offset some of the chasm impact, but probably not all of it.

Speaker Change: Probably in the second half of the year to some extent the answer to that is yes, but probably not fully.

Speaker Change: We've been consistently coming in favorable to our cost projections and the company has done a great job on that front, just given the sort of pull down that we've done fairly recently will be able to offset some of the CASM impact, but probably not all of it will.

Unknown Executive: And we'll be looking for reallocation opportunities, particularly in the charter market, as sort of as much as we can here on relatively short notice, also adding our charter. Operations drive higher unit costs, then so will our scheduled service capacity, so it won't be apples for apples as we exchange into cargo, excuse me, charter from scheduled service.

Speaker Change: We will be looking for reallocation opportunities, particularly in the charter market as much.

Speaker Change: Much as we can here on on relatively short notice.

Speaker Change: So added our charter.

Speaker Change: Operations drive higher unit cost than do our scheduled service capacity. So it won't be apples for apples as we exchange into cargo excuse me charter from.

Speaker Change: Scheduled service.

unknown: And finally, you know, really unit revenue and unit costs in

Speaker Change: Finally.

Speaker Change: Unit revenue unit costs inflect, when we start.

unknown: Inflect when we start. Operating below minimum guarantees for our crews, and we won't hit that level anyway. So we'll still be in an efficient bandwidth.

Speaker Change: Operating below.

Speaker Change: Minimum guarantees for our crews and we won't hit that level anyway. So we will still be in an efficient bandwidth.

Speaker Change: Understood that's really helpful and maybe as a follow up how would you characterize the competitive environment in Minneapolis.

unknown: I understand. That's really helpful.

Speaker Change: What's that Delta, maybe looking to ramp up there.

Speaker Change: Anything changed there.

Speaker Change: But mostly.

Speaker Change: I'm getting the information from selling schedules.

Speaker Change: Which are out through March of next year and we see.

Speaker Change: July is being the peak growth rate across our network for all the ways and.

Speaker Change: Improving condition all the way through the end of the year and into next spring.

Speaker Change: Very helpful. Thank you.

Speaker Change: Thank you.

Duane <unk>: Our next question will come from Duane <unk> from Evercore ISI. Your line is open.

unknown: And maybe as a follow-up, kind of, how would you characterize the competitive environment in Minneapolis? We heard reports that Delta may be looking to ramp up there. So has anything changed there?

unknown: Well, mostly what I mean is I'm getting the information from selling schedules which are out through March of next year, and we see July as being the peak growth rate across our network for all OA's and an improving condition.

Duane <unk>: Hey, good morning.

unknown: Network for all OA's and an improving condition all the way through the end of the year and into the next.

Duane <unk>: Can you remind us how much liquidity you want to keep on the balance sheet.

Duane Pfennigwerth: Our next question will come from Duane Pfennigwerth from Evercore ISI. Your line is open.

Unknown Executive: Hey, good morning. Can you remind us how much liquidity you want to keep on the balance sheet? Is there any desire to build up dry powder ahead of the cargo ramp next year? And just given the free cash flow you expect to generate, how are you thinking about capacity for buybacks for the rest of this year?

Duane <unk>: Is there any desire to build up dry powder ahead of the cargo ramp next year.

Speaker Change: And just given the free cash flow you expect to generate and how are you thinking about capacity for buybacks for the rest of this year.

Speaker Change: Yes, so we're sort of at.

Unknown Executive: liquidity trough for the year at sort of this time, and we'll start building liquidity as we begin selling our winter schedule. And, you know, peak liquidity sort of towards the end of the year. The thing about the liquidity of this business is we think we can operate this at probably relatively lower levels of liquidity than other airlines because a big chunk of our revenue stream is very predictable between our cargo and charter businesses.

Speaker Change: Liquidity trough for the year at sort of this time and we will start building liquidity as we begin selling sort of our winter schedule.

Speaker Change: Peak liquidity sort of towards the end of the year.

Speaker Change: The thing about the liquidity of this business as we think we can operate this that probably relatively lower levels of liquidity than other airlines, because a big chunk of our revenue stream.

Speaker Change: Is very predictable between our cargo and charter businesses.

Speaker Change: <unk>.

Speaker Change: I hesitate to throw out an exact minimum liquidity number, but it's below well below where we're at today.

Unknown Executive: You know, I hesitate to throw out an exact minimum liquidity number, but it's well below where we're at today. You know, there's really not that much of a need to build liquidity as we head into the cargo ramp because there's really no CapEx required or very, very little. You know, it'll be continuing the stream of pilot hiring that we're doing and then a reallocation of some resources from our scheduled service into the cargo business.

Speaker Change: There is really not that much of a need to build liquidity as we head into the cargo ramp because theres really no capex required or very very little capex required.

Speaker Change:

Unknown Executive: So there's not really any kind of significant liquidity need there. That'll be a liquidity positive event for us because of the improved profitability of the new cargo flying. You know, to your second question, we've done well over 100 million in share buybacks, and we'll sort of continue to look at our free cash flow profile. We're paying back a lot of debt, and our debt balances are coming down pretty quickly. So this is something that's always on our plate, and we'll probably revisit and take another look at it as we move through this year and early into next.

Speaker Change: It'll be continuing the stream of pilot hiring that we're doing and then a reallocation of some resource from our scheduled service into the cargo business. So theres not really any kind of a significant liquidity need there that'll be a liquidity positive event for us because of the improved profitability of the new cargo flying.

Speaker Change: To your second to your second question.

Speaker Change: We've done well over $100 million in share buybacks and will sort of continue to look at our free cash flow profile are we're paying back a lot of debt in our debt balances are coming down pretty quickly.

Speaker Change: This is something Thats always on our plate and we'll probably revisit and taken that they look at as we move through this year and early into next just one more thing on that Duane I mean, typically airlines require a lot of it.

unknown: Just one more thing on that, Duane. I mean, typically, airlines require a lot of

unknown: Working capital to transition new fleets because of crew training and things like that. But I just want to remind everybody that our pilots do all the flying that we do across all three segments from a single base. There's really no incremental operating costs associated with the transition.

Speaker Change: Working capital to transition new fleets, because it crew training and things like that I, just want to remind everybody that our pilots do all the flying that we do across all three segments from a single base. So.

Duane <unk>: There's really no incremental operating costs associated with the transition.

Speaker Change: Either.

Speaker Change: Yes.

unknown: Yeah, that's, that's very clear. Good reminders. And just to follow up on charter.

Speaker Change: That's very clear good reminders and just just to follow up on charter.

unknown: You know, how do you view the opportunity set now? And maybe just operationally, you know, what is the lead time you need to kind of tilt harder into that segment versus maybe scheduled service? Is that, you know, are you looking one to two quarters out, or can you react to opportunities closer in? Thanks for taking the questions.

Speaker Change: How do you view the opportunity set now and maybe just operationally.

Speaker Change: What is the lead time, you need to kind of harder into that segment versus maybe scheduled service is that.

Speaker Change: Are you looking one to two quarters out or can you react to opportunities closer and thanks for taking the questions.

unknown: Hey Duane, why don't I start it? I'll turn it over to Grant.

Speaker Change: Hey, Duane when I started and I'll turn it over to grant.

unknown: So Charter comes in kind of two flavors. One is contracted Charter flying, which is under long-term agreements. It's about seven aircraft worth of flying that we do that's related to that. And, essentially, it's us being an airline for someone else. And it's the same aircraft that our passenger scheduled service fleet operates. So it's interchangeable, but it's very dependable in volumes and profitability. And then there's a big section of charters that's ad hoc, which is booked relatively close in, high margin flying, and mostly a way for us to allocate surplus capacity to profitable flying.

Grant: So the charter comes in two flavors, one is contracted charter flying which is under long term agreements it's about seven aircraft.

Grant: Worth of flying that we do that's related to that and essentially it's us being an airline for someone else.

Grant: And it's the same aircrafts that are passenger scheduled service fleet operates so it's interchangeable, but it's very dependable.

Grant: Volumes and profitability.

Grant: And then Theres, a big section of charters Thats AD hoc which is booked.

unknown: And that's the domestic military market that we participate in. And a significant amount of sports charters that we do, predominantly for NCAA sports and major league soccer. So those are a little bit harder to predict because it's close in, but we're pretty bullish on it going into this fall as we've continued to expand that market. Would you like any other color on that? Yeah, the only thing I would add would be even in the second.

Grant: Booked relatively close in high margin flying and mostly a way for us to allocate surplus capacity into profitable flying and thats the domestic military market that we participate in.

Grant: A significant amount of sports charters that we do for predominantly NCAA sports and major League soccer.

Grant: So those are a little bit harder.

Grant: To to predict because it's close in.

Grant: But we're pretty bullish on it going into this fall as we've continued to expand that market.

Grant: Grant any other color on that the only thing I would add would be even in the second quarter. When we really were bias towards scheduled service growth using up what we thought were pretty much all of our crew resources, we still were able to pivot pretty significantly as Jude mentioned to those mills.

unknown: Even in the second quarter, when we really were biased towards scheduled service growth using up what we thought were pretty much all of our crew resources, we still were able to pivot pretty significantly, as Jude mentioned, to those military trips and those close-in ad hoc trips. And as we look towards the back half of the year, we're going to be very aggressive. There's really no waiting. Those requests are coming to us, and the team's very poised to go out.

Jude: Military trips and those close in AD hoc trips.

Speaker Change: And as we look towards the back half of the year, we're going to be very aggressive. There is really we don't have to wait those requests are coming to us and the teams very poised to go out.

And where there's an opportunity where we can do it profitably.

unknown: And where there's an opportunity where we can do it profitably, we're going to do it. And we have such a good reputation in the marketplace that people come to us pretty quickly when we have that capacity. And when things do get tight, we sort of take that capacity off, but we can turn it on very, very quickly. Which we are doing.

Speaker Change: Going to do it and we have such a good reputation in the marketplace.

Speaker Change: People come to us pretty quickly when we have that capacity and when we do we think do get tight we sort of take that capacity that we can turn it on very very quickly, which we're doing right now.

Speaker Change: Okay. Thank you.

Okay.

Speaker Change: Thank you.

Scott Group: Our next question will come from Scott Group from Wolf. Your line is now open.

Speaker Change: Our next question will come from Scott Group from Wolfe. Your line is now open.

unknown: Hey, thanks. Good morning, guys.

Scott Group: Hey, Thanks, good morning, guys.

Speaker Change: Capacity you are talking about.

Scott Group: Are you in the camp of September RASM inflection and then is there in your mind is there a risk like this is just like a head fake september's off peak in capacity starts to Reaccelerate.

Speaker Change: In Q4.

Speaker Change: No I think we're seeing a structural change in the growth rate I think we saw a reallocation of capacity into the domestic leisure market in 'twenty, two and then capacity chase that demand into big market connectivity Trans Atlantic the Midwest.

unknown: What's the capacity you're talking about? Are you in the camp of a September rasm and inflection? And then, in your mind, is there a risk that this is just like a head fake of September's off-peak, and its capacity starts to reaccelerate?

unknown: No, I think we're seeing a structural change in the growth rate, and I think we saw a reallocation of capacity into the domestic leisure market in twenty-two, and then capacity chased that demand into big market connectivity, transatlantic.

unknown: The Midwest was kind of late to get those capacity growth reallocations from the post-COVID environment, and we saw growth rates peak in July. And, you know, everybody's selling out through April now. So I feel fairly confident that our peak winter schedule will show the kind of profitability that we're all expecting as we move into this winter. So, no, I don't, I don't think so.

Speaker Change: <unk> was kind of late to get those capacity growth.

Speaker Change: Reallocations from the post Covid environment, and we saw growth rates peak in July.

Speaker Change: And everybody is selling out through April now, so I feel fairly confident that our peak winter.

Speaker Change: Schedule will show the kind of profitability that we're all expecting as we move into this winter. So no I don't think I don't think Thats the case.

unknown: Now, I don't think I don't think that's the case. September, for us, the September piece is always...

Speaker Change: September for US September piece is always yes.

unknown: Yeah, September for us is always challenging. So when we cut down capacity, obviously, we're able to identify the flights down to the very flight level that aren't going to make a positive contribution and cut those out. You know, we're expecting a pretty good September, all things considered, because we've had the time to prepare under the current environment, which is substantially different than when we planned the year out.

Speaker Change: Yes September for US is always challenging so when we cut down capacity, obviously, we're able to identify.

Speaker Change: The flights down to the very flight level that arent going to make.

Speaker Change: Positive contribution and cut those out so.

Speaker Change: Sure.

Speaker Change: We're expecting a pretty good September all things equal.

Speaker Change: Because we've had the time to prepare under the current environment, which is substantially different than when we planned the year out.

Speaker Change: Thank you can you just remind us the timing of the aircraft ramp with with Amazon and then you had a comment that we're seeing a partial impact of the higher rates in June, but we don't see the full impact until the second half of next year can you just talk.

unknown: Thank you. Can you just remind us the timing of the aircraft ramp-up with Amazon? And then you had a comment that we're seeing a partial impact of the higher rates in June, but we don't see the full impact until the second half next year. Can you just talk about that?

Speaker Change: Talk about that.

Speaker Change: Yes so.

unknown: Yeah, so I can't go into the details on how the rates come in. But basically, we got a partial increase in rates when we signed the deal. So really, that didn't have any impact on our numbers until June. So the effect of the second quarter of the new Amazon rates is very small.

Speaker Change: Can't go into the details on how the rates come in but basically we got a a partial increase in rate when we signed the deal. So really that didn't have any impact on our numbers until.

Speaker Change: Until June so the affected the second quarter of the new Amazon races.

Speaker Change: Very small.

Speaker Change: But there is this piece that came in when we signed the deal and then additional increases as the aircraft come in in the aircraft right now we expect to start arriving in March.

unknown: But there's this piece that came in when we signed the deal, and then additional increases as the aircraft come in. And the aircraft right now, we expect to start arriving in March of 2025 and then to come in relatively quickly, so that by the third quarter, they're kind of all on board here. Now, things can move left or right a little bit, but that's the instruction we've been given and sort of the path that we're on.

Speaker Change: Of 2025, and then to come in relatively quickly so that by the third quarter Theyre kind of all onboard here now things can move left to right a little bit but that's the that's the instruction, we've been given and sort of the path that we're on.

Speaker Change: And so we still get like this I.

unknown: And so we still get like this. I guess, for lack of a better word, like two bites of the apple next year when we get the Q1 benefit of schedule. And then we get the cargo ramp.

Speaker Change: I guess for lack of a better word like two bites of the Apple next year, where we get the.

Speaker Change: The Q1 benefit of scheduled.

Speaker Change: Then we get the.

Speaker Change: Cargo ramp in.

The rest of the year, yes, yes, that's exactly right. So.

unknown: The rest of the year. Yeah, yeah, that's exactly right. So you know, we're, look, we're really bullish on next year, and part of the reason is what you just said. So we're going to be able to continue allocating all of our resources to scheduled service or, you know, as much as necessary to schedule service in Q1, which obviously is the biggest quarter for us by far, and then transition very smoothly as things slow down for us into the cargo business more. So it kind of works out really well.

Speaker Change: Well.

Speaker Change: Look we're really bullish on next year and part of the reason is what you just said so we're going to be able to continue allocating all of our resources to scheduled service services.

Speaker Change: As much as necessary as scheduled service in Q1, which obviously is the biggest quarter for us by far and then transition very smoothly as things slow down for us into the into the cargo business more so it kind of works out really well.

Speaker Change: Okay.

Scott Group: Thank you guys. Thanks, Scott.

Speaker Change: Thank you guys.

Scott Group: Thanks Scott.

Speaker Change: Thank you.

Michael Linenberg: Thank you. Our next question will come from Michael Linenberg of Deutsche Bank. Your line is open.

Speaker Change: Our next question will come from Michael Lindenberg from Deutsche Bank. Your line is open.

Michael Lindenberg: Oh, Yeah, Hey, good morning, everyone.

unknown: Look at your schedule for the winter. You talk about 55 or more than 55 cities that you're going to serve nonstop from Minneapolis. When I think about what you're going to serve and maybe what you were serving a year ago, it does seem like there are some markets that you have pulled out of. Curious, you know, what is the common denominator in some of those markets? Was it just? They didn't ramp up well, they didn't accompany maybe some of the charter flying that you did, you know, maybe they were sort of part of a package, or, you know, it's just the competitive response. Anything we can take away from that?

Speaker Change: When I look at.

Michael Lindenberg: You are scheduled through the winter you talk about 55 or more than 55 cities that you are going to serve nonstop from Minneapolis.

When I when I think about what youre going to serve and.

Michael Lindenberg: Maybe what you were serving a year ago. It does seem like there is some markets that you have pulled out of curious what is.

Speaker Change: The common denominator in some of those markets was it just.

Speaker Change: They didnt ramp up well data in our company maybe some of the charter flying that you did maybe there was sort of part of the package.

Speaker Change: Or it's just the competitive response anything we can take away from that.

Speaker Change: Well first.

unknown: Well, first, there are seasonal markets that happen.

Speaker Change: The seasonal markets that to happen across our network.

unknown: that are going to be repetitive every year and nearly...

Speaker Change: That are going to be repetitive every year and nearly everything every market works from Minneapolis.

unknown: Nearly everything, every market works from Minneapolis in June and July. Nearly all of our winter, I mean, we need more capacity in winter, and nearly everything works. I think everything works in that period of time as well, but they're very different networks from summer to winter. I think the thing to watch is as we go into summer 25, some of our markets will be on the network until future years, and that's because of reallocation into cargo, but our winter network will be intact. Okay, that's helpful. And then, just secondly, as you ramp up and bring on the additional airplanes, and you talk about

Speaker Change: In June and July nearly all of our winter wheat.

Speaker Change: We need more capacity in winter.

Speaker Change: And nearly everything works I think everything works.

Speaker Change: In that period of time, as well, but they're very different networks summer to winter.

Speaker Change: Okay.

Speaker Change: The thing to watch is as we go into summer 'twenty five some of our markets will need to be suspended through summer 'twenty, five and not come back into the network until future years, and thats because of reallocation into cargo.

Speaker Change: Winter network will be intact, yes.

unknown: Okay, that's helpful. And then, just secondly, as you ramp up and bring on the additional airplanes, and you talk about, you know, sort of reallocating resources, where are we on pilots and staffing, you know, first officers versus captains? Should we see any sort of teething issues as we ramp up into 2025 with the additional airplanes coming on for cargo, etc.? Thanks. Thanks for taking my question.

Speaker Change: Okay. That's helpful.

Then just secondly, as you ramp and bring on the additional airplanes and you talked about sort of re re allocating resources.

Speaker Change: Where are we on on pilots and staffing.

Speaker Change: First officers versus captains should we see any sort of teething issues as we as we ramp up into 2025 with the additional airplanes coming on for cargo et cetera. Thanks, Thanks for taking my questions.

Speaker Change: Yes. This is Greg I think with our with regard to pilots, we've been able to allocate resources.

Speaker Change: You'll not be constrained by by pilots or staffing really generally.

unknown: Generally, so as we look out into 2025, we don't see any change to that. We see an overall industry.

Speaker Change: So as we look out into 2025, we don't see any change to that we see overall industry hiring is way down so things look good for us we still we still would love to have more captains upgrade but at this point in time Thats not constraining our growth we feel really really is.

unknown: Things look good for us. We still would love to have more captains upgrade, but at this point in time, that's not constraining our growth. We feel really, as Dave said, bullish about 2025.

unknown: at Bullish about 2025.

Speaker Change: As Dave said bullish about 2025.

Speaker Change: Great. Thanks.

Speaker Change: Thank you.

Operator: And as a reminder, to ask a question, please press star 11. Again, that's star 11 to ask a question. One moment for our next question, please. And our next question will come from Tom Fitzgerald from TD Cowen. Your line is open.

Speaker Change: And as a reminder to ask a question. Please press star one again Thats star one to ask a question.

Speaker Change: One moment for our next question please.

Speaker Change: And our next question will come from Tom Fitzgerald from TD Cowen Your line is open.

Tom Fitzgerald: Hi, everyone. Thanks for the time. Can we just go back to capital allocation again and, you know, given everything about where the business is going and how cheap the stock is right now, why not issue debt instead of paying down debt and use the proceeds to buy back your stock?

Tom Fitzgerald: Hi, everyone. Thanks for the time can we just go back to capital allocation again.

Tom Fitzgerald: Given everything with where the business is going and how cheap the stock is right now why not issue that instead of paying down debt and use the proceeds to buy back your stock.

unknown: Look, we've sort of considered all different avenues here. Debt isn't as cheap as it could be at this point.

Speaker Change: Look we've sort of considered all different avenues here that it isn't that isn't sort of cheap as it is it could be at this point.

unknown: We're kind of looking at everything. You know, we're sort of making capital allocation decisions here, not just for the next three to six months, but for the long term. We want to continue to operate with a conservative balance sheet and sort of load up with more debt right now to buy back stocks, probably not something that we're going to do in the short term.

Speaker Change: We're kind of looking at everything.

Speaker Change: We're sort of making capital allocation decisions here not just for the next.

Speaker Change: Three to six months, but for the long term, we want to continue to operate with a conservative balance sheet.

Speaker Change: And sort of loading up with more debt right now to buy back stock is probably not something that we're going to do in the short term.

Speaker Change: Okay Fair enough. That's helpful. And then just like longer term kind of whats the kind of get past 2020, how are you thinking about the network and whether you need another focus city beyond Minneapolis, Thanks again for the time.

unknown: Okay, fair enough. That's helpful. And then, just like longer term, kind of once you kind of get on past 2026, just how are you thinking about the network and whether you need another focus study beyond Minneapolis? Thanks again for your time.

Tom Fitzgerald: Hey, Tom.

unknown: There's not a lot of growth opportunities outside of Minneapolis, other than the stuff that we already have in the schedule, like Texas origination down to Mexican Caribbean markets in the summertime. In the past, we've had a lot of success expanding our Midwest footprint into origination markets around Minneapolis. We also had a nice business in 2019 flying Hawaii. Hawaii's not a great place to be right now.

Tom Fitzgerald: Theres not a lot of growth opportunities outside of Minneapolis other than the stuff that we already have in the schedule like.

Tom Fitzgerald: Texas origination down in Mexican Caribbean markets in the summertime.

Tom Fitzgerald: In the past we've had a lot of success expanding our Midwest footprint into origination markets around Minneapolis.

Speaker Change: <unk> had a nice business in 2019 flying.

Speaker Change: Hawaii, Hawaii is not a great place to be right now so with the yield environment Theres not theres, nothing thats obvious and urgent for.

unknown: So, with the yield environment, there's nothing that's obvious and urgent for us to move into. And so, I think what we're, quite frankly, going to be waiting on some of our competitors to go through some challenging times and free up some opportunity for us. And that's why we want to think about having.

Speaker Change: For us to move into and so I think what we are.

Speaker Change: Quite frankly, what we're going to be waiting on is some.

Speaker Change: Of our competitors to go through some challenging times and free up some opportunity for us and Thats why we wanted to think about having.

unknown: Some powder on the balance sheet and just being

Speaker Change: Some powder on the balance sheet and.

Speaker Change: And just being able to be dynamic to be able to reallocate capacity when it presents itself, which I think is going to be an opportunity that's difficult to predict as we sit here today.

unknown: I think this is going to be an opportunity that's difficult to predict as we sit here today. The best thing for us in the near term is, as we talked about cargo and charter.

unknown: The best thing for us in the near term is, as we talked about, cargo and charter opportunities. Yeah, this is Dave.

Speaker Change: The best thing for us in the near term. It is as we talked about cargo in charter opportunities.

Dave Davis: I completely agree with what you just said. 25 for us is a year of integrating these new cargo aircraft and taking advantage of the economics of that new deal. And then we'll look at the landscape in 26. You know, there are growth opportunities. There could be growth opportunities here, growth opportunities elsewhere, but we'll see what the landscape looks like in 26 and beyond. I think given the state of some others, we expect it to be a different landscape than it looks like at this particular moment.

Speaker Change: Yes. This is Dave I just wait.

Dave: We agree with what you just said 25 for US is a year of integrating these new cargo aircraft taking advantage of of the economics of that new deal and then we'll look at the landscape in 'twenty six.

Dave: This growth opportunities there can be growth opportunities here growth opportunities elsewhere, but we'll see what the landscape looks like in 2006 and beyond that I think given the state of some others. We expect it to be a different landscape than that it looks like at this particular minute.

Dave: Does that conclude your questions Mr Fitzgerald.

Yes. Thanks, Thanks, very much for the time everyone.

Tom Fitzgerald: Thank you. Thanks, Tom.

Speaker Change: Thank you thanks, Tom one moment for our next question.

Speaker Change: And we do have a follow up from Scott Group from Wolfe. Your line is open.

Operator: One moment for our next question. And we do have a follow-up from Scott Group from Wolfe. Your line is open. Hey guys, thanks for the follow-up.

Scott Group: Hey, guys. Thanks for the follow up.

Scott Group: Hey guys, thanks for the follow-up. So just, I just want to make sure we're thinking about full year 25, right, with the moving pieces. Can you just remind us how to think about how much Scheduled ASMs are going to be down and then, you know, what you think a full year sort of block hours is for cargo.

Speaker Change: Just.

Scott Group: I just wanted to make sure we're thinking about.

Scott Group: Full year 'twenty five right just with the moving pieces can you just remind us how to think about how much.

Speaker Change: Scheduled ASM are going to be down and then.

Speaker Change: What you think a full year sort of block hours for cargo.

Speaker Change: Yeah. So.

Speaker Change: Let me sort of just describe it this way so basically we are going to be taking these cargo aircraft in and that is going to have sort of the first call on resources that we have here, particularly on the pilot front.

unknown: Let me sort of just describe it this way. So, basically, we're going to be taking these cargo aircraft in, and that is going to be sort of the first call on the resources that we have here, particularly on the pilot front. Then, as we have remaining resources available, we'll allocate that between scheduled service and charter, depending on where the opportunity is. So part of this depends on exactly where we sit from a pilot availability standpoint. Frankly, going into twenty-five, you know, our current outlook is likely to be down high, single, low, double digits on a block hour basis or, sorry, on an ASM basis for scheduled service, but that could move left or I think we'll have block hour growth for cargo next year. Unknown Speaker, give me one second here.

Speaker Change: Then as we have remaining resources available, we'll allocate that between scheduled service in charter depending on where the opportunity is so part of part of this depends on.

Speaker Change: On exactly where we sit from a from a pilot availability standpoint, frankly going into 'twenty five.

Speaker Change: Our current outlook is likely to be down high single low double digits.

On a block hour basis, or sorry on an ASM basis for scheduled service, but that could move left or right depending on exactly where we sit from a from a pilot perspective, I think we had the block hour growth for cargo next year.

Speaker Change: Okay.

Speaker Change: With me one second here.

unknown: Yeah, I don't know the 25 number right in front, and we can follow up with you on that, but it'll obviously be significant for it since we're bringing in eight new aircraft. But, you know, the size of our scheduled service and charter business is going to be driven by, you know, resource availability, particularly pilots.

Speaker Change: Yes, I don't know 25 number right in front and we can follow up with you on that but it will obviously be significance, where it since we're bringing in since we're bringing in eight new aircraft.

Speaker Change: But the size of our scheduled service in charter business is going to be driven by.

Speaker Change: Resource availability, particularly pilots.

Speaker Change: Okay.

unknown: and any thoughts on what that next shift should mean from a total cost or unit cost perspective?

Speaker Change: And any thoughts on what that.

Speaker Change: Mix shifts should mean from a.

Speaker Change: Just total cost or unit cost perspective.

Speaker Change: Probably a little premature to sort of talk.

unknown: It's probably a little premature to sort of talk about that as to what's going to happen with Chasm next year precisely. You know, the cargo business is going to consume, you know, some of our resources here. So there's going to be some additional allocation of overhead and other things to the cargo business. So that mix just isn't sort of straightened out quite yet. Yeah, sorry, just quickly. Yeah, I think, as we sit right now, we're expecting the cargo segment to be up, let's say, 60 to 63% in block hours in 2025 compared to 2024.

Speaker Change: Talk about that as to what's going to happen with CASM next year precisely.

Speaker Change: The cargo business is going to consume.

Speaker Change: Some of our resources here, so theres going to be some additional allocation of overhead and other things to the cargo business. So that makes just isn't sort of straightened out quite yet.

Speaker Change: Yes.

Speaker Change: Just.

Speaker Change: Yes, sorry, just quickly I think.

Speaker Change: As we sit right now we're expecting the cargo segment to be up, let's say, 60% to 63% and block hours in 2025 over 2024.

Speaker Change: Hopefully it doesn't sound like anything from what you guys laid out for US in June when you first made this announcement.

unknown: Ultimately, it doesn't sound like anything from what you guys laid out for us in June when you first made this announcement. It doesn't sound like anything's really changed. Nothing's really changing significantly. I'll tell you, the only trend that's changing is the

Speaker Change: Sounds like anything is really changing.

unknown: Nothing's really changing significantly. I'll tell you the only trend that we're seeing a little bit is maybe a little bit of improved pilot availability, which would say, maybe we could be a little bit bigger next year from a scheduled service perspective on the call. I said down 10 to 12, I think, a percent in the scheduled service segment. Our latest numbers are more like high single digits. So that's the number that's kind of moving left and right right now.

Speaker Change: Yes.

Speaker Change: Nothing is really changing significantly I'll tell you the only trend that we're seeing a little bit is maybe a little bit of improved pilot availability, which would say maybe we could be a little bit bigger next year from a scheduled service perspective on the call I said down 10% to 12 I think.

Speaker Change: <unk> percent and the scheduled service segment, our latest numbers have is more like high single digits.

Speaker Change: So that's the number that's kind of moving left and right right now, but the cargo delivery schedule of the aircrafts. They talked about on the last call is still relevant important that you called out the seasonality of the growth is really beneficial for us. So the first quarter will be intact, and we will see at.

unknown: But the cargo delivery schedule of the aircraft they talked about on the last call is still relevant. Importantly, you called out the seasonality of the growth is really beneficial for us. So the first quarter will be intact, and we'll see at least mid-single-digit growth in January, February, March, and then as we move into the year and start taking cargo airplanes, that's where we'll see a drawdown of our SCET business.

Speaker Change: At least mid single digit growth.

Speaker Change: January February March and then as we move into the year and start taking cargo airplanes, that's where we'll see a drawdown of our <unk> business.

Speaker Change: Okay.

Speaker Change: Thank you guys appreciate it.

Scott Group: Thanks Scott.

Speaker Change: Thank you.

Michael Linenberg: And our next follow-up comes from Michael Linenberg from Deutsche Bank. Your line is open.

Speaker Change: And our next follow up comes from Michael Lindenberg from Deutsche Bank. Your line is open.

Michael Lindenberg: Oh, Yeah, Hey, thanks for the follow up but just a quick as we think about composition of revenue do we get to like 35 or 40% of your revenue is cargo.

unknown: Oh, yeah. Hey, thanks for the follow up. But just a quick question, as we think about the composition of revenue, do we get to like 35 or 40% of your revenue is cargo and or charter for next year, or am I just too high?

Speaker Change: <unk> charter for next year or am I, just too high.

unknown: Unknown Speaker.

Speaker Change: I'm, just trying to get a better sense.

unknown: I think that number is probably not unrealistic for 26, but that sort of 35 plus number in 25 is not going to be that high. I want to point out... Block hours, we might get something like that. Towards the end of next year and going into the net the subsequent year, but the density of revenue is a lot higher in Charter and Scheduled Service because of fuel passing.

Speaker Change: I think that number is probably not unrealistic for 'twenty, six but that sort of 35, plus number in <unk> and 'twenty.

Speaker Change: 25% is that going to be that high I wanted to point out.

Speaker Change: Block hours, we might get something like that.

Speaker Change: Towards the end of next year and going into the subsequent year, but.

Speaker Change: The density of of revenue is a lot higher.

Speaker Change: <unk> charter in scheduled service because of fuel pass through.

Speaker Change: And some of the costs too so.

unknown: and some other costs too. So the revenue per block hour is a lot lower in cargo just because of the way the accounting is treated for fuel expenses that we don't pay for and things like that. Yeah, I'm just thinking about

Speaker Change: So the revenue per block hour is a lot lower and cargo just because of the way. The accounting is treated for fuel expenses that we don't pay and things like that.

Speaker Change: Yes, I'm just thinking about how that's going to impact your cost and also your fuel bill since.

unknown: Yeah, I'm just thinking about how that's going to impact your costs and also your fuel bill since a big chunk of your business is going to be this pass-through. Okay, no, that's helpful. Thank you.

Speaker Change: Big chunk of your business it is going to be this pass through okay now.

Speaker Change: Thank you.

Mark: Thanks Mark.

Speaker Change: Thank you.

Operator: And I am showing no further questions on our phone lines. I'd now like to turn the conference back over to Jude Bricker for any closing remarks.

Speaker Change: And I am showing no further questions in our phone lines I'd now like to turn the conference back over to Jude Bricker for any closing remarks.

Jude Bricker: Thanks for your interest, guys. There are three big points.

Speaker Change: Thanks for your interest guys three big points capacity growth has peaked and we feel that it is going to be a constructive fare environment move.

Speaker Change: Moving to the end of the year.

Jude Bricker: Capacity growth has peaked, and we feel that it's going to be a constructive, fair environment moving through the end of the year. Our block hour growth will continue, but we're going to shift into cargo predominantly, and we're really bullish on our free cash flow production as we have already acquired the growth for the next several years. And lastly, I'll end by just being so proud to be part of this team that executed so well through such a challenging period. This IT interruption the whole industry had to deal with was severe for our frontline employees, and they executed beautifully. And I'm just so proud of them.

Speaker Change: Black our growth will continue but we're going to shift into cargo predominantly and we're really bullish on our free cash flow production as we have already acquired the growth.

Speaker Change: For the next several years.

Speaker Change: And lastly, I'll end has just been so proud to be part of this team that executed so well through such challenging period.

Speaker Change: This interruption the whole industry had to deal with was with severe.

Speaker Change: For our frontline employees and they executed beautifully and I'm, just so proud of them.

Operator: Thanks, and we'll talk to you guys next quarter. I appreciate your interest. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day. Title Microsoft Office Word 97-2003 Document MSWordDoc Word. Document.8

Speaker Change: Thanks, and we'll talk to you guys next quarter I appreciate your interest.

Speaker Change: Thank you. This concludes today's conference call.

Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

Speaker Change: Thank you for your participation you may now disconnect everyone have a wonderful day.

Operator: ??? ??? ??? ??? ??? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Welcome to the Sun Country Airlines second quarter 2024 earnings call. My name is Crystal and I'll be your operator for today's call.

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Operator: At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, this call will be recorded. I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

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Chris Allen: 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'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements that are based upon a manager's current beliefs, expectations, assumptions, or are subject to risks and uncertainties. However, actual results may differ materially.

Crystal: Welcome to the Sun Country Airlines second quarter 2024 earnings call. My name is Crystal and I will be your operator for today's call.

Speaker Change #100: At this time all participants are in a listen only mode.

Speaker Change: Later, we will conduct a question and answer session and instructions will be given at that time.

Speaker Change #100: As a reminder, this call will be recorded I will now turn the call over to Chris Allen Director of Investor Relations. Mr. Allen you may begin.

Chris Allen: 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 your questions before we begin I'd like to remind everyone that during this call. The company may make certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions are subject to risks and uncertainties actual results.

Speaker Change #100: May differ materially we encourage you to review our risk factors and cautionary statements outlined in our earnings release on our most.

Speaker Change: And our most recent SEC filings, we assume no obligation to update any forward looking statements you can find our second quarter 2024 earnings press release on the Investor Relations.

Speaker Change: IR Dot Sun country Dot com with that said I'd now like to turn the call over to Julian Thanks, Chris Good morning, everyone.

Jude Bricker: Thanks, Chris. Good morning, everyone. Our diversified business model is unique in the airline industry.

Julian: Our diversified business model is unique in the airline industry due to the predictability of our charter and cargo businesses, we're able to deliver the most flexible scheduled service capacity in the industry. The combination of our scheduled flexibility and low fixed cost model allows us to respond to both predictable leisure demand fluctuations and <unk>.

Julian: This industry shocks.

Julian: We believe due to our structural advantages will be able to reliably deliver industry, leading profitability throughout all cycles.

unknown: [inaudible]

Speaker Change #101: I wanted to start by acknowledging our employees that have worked so hard through this challenging summer in both June and July we've grown scheduled service departures in excess of 15% year on year, while facing some extended aircraft out of service events in an outage that temporary disable the key operational system our employees like usual.

unknown: Our structural advantages will be able to reliably deliver industry-leading profitability throughout our site.

Speaker Change #100: <unk> delivered for our customers and I'm personally grateful.

Julian: There's been a lot of discussion about overcapacity in our industry for us in our key market of Minneapolis. The domestic seat growth rate peaked in July and subsides through the rest of the year and into next spring as such we expect lessening fare pressure as we move through the year, it's encouraging to see the industry move aggressively to <unk>.

Speaker Change #100: Rightsize schedules are reaction to changes in market environment will always be to adjust capacity. Our July Minneapolis seats were up 29% year on year by September our seats will be down 9% year on year July scheduled service volume will be two and a quarter times larger than September September.

Speaker Change #100: Always being the most challenging month for leisure demand as already announced we will move capacity aggressively into our other segments charter and cargo we still expect a strong winter season for leisure and are planning mid single digit capacity growth for our peak upcoming winter I want to point out that June and July continued to be strong demand months for our <unk>.

Jude Bricker: As already announced, we will move capacity aggressively into our other segments, charter and cargo. We still expect a strong winter season for leisure and are planning mid single-digit capacity growth for our peak winter. I want to point out that June and July continue to be strong demand months for our scheduled service product. We sold loads in excess of eighty five percent during both months with unit revenues up nearly twenty percent versus pre-COVID comps, even considering our growth.

Speaker Change #100: <unk> service product, we had sold loads in excess of 85% during both months with unit revenues up nearly 20% versus pre COVID-19 costs, even considering our growth our ability to manage off peak capacity, while maintaining our unit cost advantage, mostly explains the outperformance of our scheduled business as compared to other domestic leisure carriers.

Speaker Change #100: In cargo, we have contractual growth along with rate improvements through the end of 2025 for charter while volumes were generally flat, we've been able to manage to higher margins as we adjust our pre COVID-19 long term contracts to the new cost environment.

Jude Bricker: While volumes were generally flat, we've been able to manage higher margins as we adjust our pre-COVID long-term contracts to the new.

Jude Bricker: Long-Term Contracts to the New Cost Environment. As mentioned before, we have fleet expansion plans for 71 aircraft from our current in-service fleet of 56. All this growth will come from our leased-out fleet, 7 aircraft, and from committed cargo delivery, 8 aircraft. In both cases, this growth won't require additional capital. So we expect to continue to deliver high free cash flow yields in the near term. And with that, I'll turn it over to Dave. Thanks, Jude.

Speaker Change #100: As mentioned before we have fleet expansion plans at 71 aircraft from our current in service fleet of 56, all of this growth will come from our leased out fleet seven aircraft and from committed cargo deliveries eight aircraft in both cases this growth will require additional capex. So we expect to continue to deliver high free cash flow yields in.

Dave: The near mid term and with that I'll turn it over to Dave.

Dave Davis: We're pleased to report that Q2 was our eighth consecutive quarter of profitability and that through the first half of 2024, Sun Country was the most profitable airline in the U.S. This is despite the fact that, unlike for most other carriers, Q2 is a seasonally slower quarter for Sun Country. The domestic revenue environment continues to be impacted by overcapacity, and the resulting impact on fares is at domestic focused LCCs, the hardest. However, our resilient business model has allowed us to remain profitable because of the diversity of our revenues.

Dave: Thanks, Jude we're pleased to report that Q2 was our eighth consecutive quarter of profitability and that through the first half of 2020 for Sun country was the most profitable airlines in the U S.

Speaker Change #102: This is despite the fact that unlike for most other carriers Q2 is a seasonally slower quarter for Sun country.

Dave: The domestic revenue environment continues to be impacted by overcapacity, and the resulting impact on fares as a domestic focused lcc's. The hardest our resilient business model has allowed us to remain profitable because of the diversity of our revenue streams.

Speaker Change #100: As we move through the third quarter, we are slowing scheduled capacity growth, while our model allows us to make tactical capacity allocation decisions quickly large moves require several quarters to execute.

Dave: As we mentioned during our announcement of our revised agreement with Amazon. Some countries cargo segment will become a larger portion of our business starting in mid 2025 by.

Speaker Change #100: By 2026, we expect revenue from our cargo segment to be almost 20% of our total revenue versus approximately 10% in 2024.

Speaker Change #100: The expansion of our cargo segment comes with almost no required capex and drives improved profitability and greater free cash flow. This is the essence of the Sun country business model.

Speaker Change #100: Let me now turn to the specifics of the second quarter.

Speaker Change #100: First our revenue and capacity in the second quarter total revenue declined two 6% versus the second quarter of 2023 to $254 4 million.

Speaker Change #100: For our passenger segment, which includes our scheduled service in charter businesses total revenue fell 5% year over year.

Speaker Change #100: Scheduled service revenue declined seven 2% driven by a 21, 3% decline in scheduled service <unk> and an 18, 2% increase in ASM.

Speaker Change #100: Clearly we flew more during off peak periods in the demand environment could support.

Speaker Change #100: In addition, we were impacted by late June operational challenges in MSP.

Speaker Change #100: Reduced passenger revenue by between $1 million and $1 5 million.

Dave Davis: In response to the soft demand environment, we're curtailing our growth in the third quarter and expect scheduled service ASMs to be up 7 to 8% year over year versus roughly 15% we were originally planning. We expect year-over-year growth to fall further in Q4. The pulldown comes mainly from reducing off-peak flying.

Speaker Change #100: In response to the soft demand environment, we are curtailing our growth in the third quarter and expect scheduled service ASM to be up 7% to 8% year over year versus roughly 15%. We were originally planning.

Speaker Change #100: We expect year over year growth to fall further in Q4.

Speaker Change #102: Pull down comes mainly from reducing off peak flying scheduled service ASM for a full network will still grow in July by about 16% year over year, but by September they will shrink by 11%.

Dave Davis: Scheduled service ASMs for our full network will still grow in July by about 16% year over year, but by September they will shrink by 11%. The average total fare per passenger fell by 20.1% during the quarter. While total fares declined versus last year, the second quarter was the first since COVID that we flew more ASMs in the second quarter of 2019, and Q2-24 scheduled service TRASM was 12.3% higher than Q2-19. Charter revenue in the second quarter grew 2.8% to $51 million, which was a new quarterly high.

Speaker Change #102: Average total fair per passenger fell by 21% during the quarter.

Speaker Change #102: While total <unk> declined versus last year. The second quarter was the first since COVID-19 that we flew more ASM in the second quarter of 2019, and Q2 'twenty four scheduled service <unk> was 12, 3% higher than Q2 of <unk> 19.

Speaker Change #102: Charter revenue in the second quarter grew two 8% to $51 million, which was a new quarterly high.

Speaker Change #102: This result was even more impressive as second quarter charter block hours declined 10, 2% year over year due to scheduling improvements, which reduce the number of fairy flights we operated.

Speaker Change #102: At hoc charter revenue grew significantly versus last year and was 23% of the total charter revenue versus 13% in the second quarter of last year.

Speaker Change #102: For our cargo segment revenue grew by one 7% to $25 $4 million on a two 4% decrease in block hours cargo block hours are influenced by scheduled heavy maintenance events, which drive moderate changes in aircraft availability, we expect year over year cargo block hours to grow in both the third and.

Speaker Change #102: <unk> fourth quarter of this year, and then to inflect sharply upward in 2025 as we take an unexpected eight additional freighter aircraft throughout the year.

Speaker Change #102: June was the first month that a portion of the revised Amazon contract rates went into effect.

Speaker Change #102: Full impact of the new rates will not be in effect until the second half of 2025.

Dave Davis: Turning now to cost, second quarter total operating expenses increased 7.3% and an 8.9% increase in total block hours. Chasm declined by 5.1% versus the second quarter of 2023, while adjusted chasm declined 4.9%, marking our third consecutive quarter of year-over-year decline. As our pilot availability issues have eased, we've been able to grow flying through higher aircraft utilization, which was seven and a half hours per day in the second quarter, up 11.9% versus the second quarter of last year.

Speaker Change #102: Turning now to costs.

Speaker Change #102: First quarter total operating expenses increased seven 3% on an eight 9% increase in total block hours CASM.

Speaker Change #102: CASM declined by five 1% versus the second quarter of 2023, while adjusted CASM declined four 9%, marking our third consecutive quarter of year over year declines.

Speaker Change #102: As our pilot availability issues have eased, we've been able to grow flying through higher aircraft utilization, which was seven and a half hours per day in the second quarter up 11, 9% versus the second quarter of last year.

Speaker Change #102: Our declining CASM came despite increases in both brown handling costs and higher airport fees ground handling expenses grew by 16, 6% year over year, driven by a 20% increase in scheduled service departures, while the roll off of Covid relief payments that airports had been using to minimize rate increases contribute.

Speaker Change #102: Due to a 14, 9% increase in landing fees and airport rent expenses.

Speaker Change #102: As we move into Q3, the slowing growth in our scheduled service business is likely to result in an increase in adjusted CASM.

Speaker Change #102: Regarding our balance sheet, our total liquidity at the end of the second quarter was $153 million year to date, we spent $38 2 million on Capex at this point, we do not need to purchase any incremental aircraft until we began looking for 2027 capacity, we continue to generate strong free cash flow and we see.

Speaker Change #102: We'll anticipate full year 2020 for capex to be well below $100 million.

Speaker Change #102: Our leverage remains low with our net debt to adjusted EBITDA ratio at the end of the second quarter at two six times.

Speaker Change #102: Finally, the effective income tax rate increased substantially during the three months ended June 32024, as compared with the prior year due to some additional tax expense related to stock compensation.

Dave Davis: Turning to our guidance, we expect third quarter total revenue to be between $245 and $255 million on block hour growth of 5 to 8 percent. We're anticipating our cost per gallon for fuel to be $2.82, and for us to achieve an operating margin between 3% and 5%. Our business is built for resiliency and will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, I'll open it up to questions.

Speaker Change #104: Turning to our guidance, we expect second quarter total revenues show a third quarter total revenue to be between 245 and $255 million on block hour growth of 5% to 8% we.

Speaker Change #102: We're anticipating our cost per gallon for fuel to be $2 82.

Speaker Change #102: And for us to achieve an operating margin between three and 5%.

Speaker Change #102: Our business is built for resiliency and we will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility.

Speaker Change #104: I'll open it up for questions.

Speaker Change #102: Thank you.

Operator: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question will come from Ravi Shanker from Morgan Stanley. Your line is now open. Thanks, morning.

Speaker Change #104: As a reminder to ask a question. Please press star one.

Speaker Change #104: One on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby we compile the Q&A roster.

Speaker Change #111: And our first question will come from Ravi Shanker from Morgan Stanley. Your line is now open.

Ravi Shanker: Thanks, good morning everyone. So big capacity cuts in the back half, that is good to see from an overall industry perspective, but given your unique model and the ability to move around resources, is there anything you guys can do to reallocate those resources to kind of offset the impact on CASM?

Ravi Shanker: Thanks, Good morning, everyone.

Speaker Change #109: So make capacity cuts in the back half that was good to see from an overall industry perspective.

Speaker Change #110: Given your unique model.

Ravi Shanker: Our ability to move around resources kind of is there anything you guys can do to reallocate those resources to kind of offset the impact on CASM.

Ravi Shanker: Okay.

Speaker Change #104: Probably in the second half of the year to some extent the answer to that is yes, but probably not fully.

Speaker Change #104: We've been consistently coming in favorable to our cost projections and the company has done a great job on that front, just given the sort of pull down that we've done fairly recently will be able to offset some of the CASM impact, but probably not all of it will.

Ravi Shanker: We will be looking for reallocation opportunities, particularly in the charter market as much as we can here on on relatively short notice.

Ravi Shanker: <unk> added our charter.

unknown: Operations, Drive, Hire

Speaker Change #110: Operations drive higher unit cost than do our scheduled service capacity. So it won't be apples for apples as we exchange into cargo excuse me charter from <unk>.

unknown: Unit Costs, then do our Scheduled Service Capacity, so it won't be apples for apples as we exchange into cargo, excuse me, charter from Scheduled Service Capacity.

unknown: Scheduled Service

Ravi Shanker: Scheduled service.

unknown: And finally, you know, really unit revenue and unit costs in

Ravi Shanker: And finally.

Ravi Shanker: Really unit revenue unit costs inflect, when we start the <unk>.

unknown: Inflect when we start. Operating below minimum guarantees for our crews, and we won't hit that level anyway. So we'll still be in an efficient bandwidth.

Ravi Shanker: Operating below.

Ravi Shanker: Minimum guarantees for our crews and we won't hit that level anyway. So it will still be in an efficient bandwidth.

unknown: Andres, that was really helpful. And maybe as a follow-up, kind of, how would you characterize the competitive environment in Minneapolis? We're hearing reports that Delta may be looking to ramp up there. So has anything changed there?

Speaker Change #109: Understood that's really helpful and maybe as a follow up how would you characterize the competitive environment in Minneapolis on your part.

Speaker Change #106: That delta may be looking to ramp up there so has anything changed there.

Speaker Change #109: But mostly <unk>.

Speaker Change #105: Getting the information from selling schedules.

Speaker Change #105: Which youre out through March of next year, and we see <unk>.

Speaker Change #105: July is being the peak growth rate across our network for all of <unk> and <unk>.

unknown: Network for all OA's and an improving condition all the way through the end of the year and into the next.

Speaker Change #105: Improving condition all the way through the end of the year and into next spring.

Speaker Change #112: Very helpful. Thank you.

Speaker Change #105: Thank you.

Duane Pfennigwerth: Our next question will come from Duane Pfennigwerth from Evercore ISI. Your line is open.

Duane <unk>: Our next question will come from Duane <unk> from Evercore ISI. Your line is open.

Duane <unk>: Hey, good morning.

Duane <unk>: Can you remind us how much liquidity you want to keep on the balance sheet.

Duane <unk>: Is there any desire to build up dry powder ahead of the cargo ramp next year.

Speaker Change #110: And just given the free cash flow you expect to generate and how are you thinking about capacity for buybacks for the rest of this year.

Speaker Change #105: Yes, so we're sort of at.

Unknown Executive: Liquidity troughs for the year at sort of this time, and we'll start building liquidity as we begin selling our winter schedule, and you know peak liquidity sort of towards the end of the year. You know, the thing about the liquidity of this business is we think we can operate this at probably relatively lower levels of liquidity than other airlines because a big chunk of our revenue stream is very predictable between our cargo and charter businesses. You know, I hesitate to throw out an exact minimum liquidity number, but it's well below where we're at today.

Speaker Change #111: Liquidity trough for the year at this time and we will start building liquidity as we begin selling sort of our winter schedule.

Speaker Change #105: Peak liquidity sort of towards the end of the year.

Speaker Change #105: The thing about the liquidity of this business as we think we can operate this that probably relatively lower levels of liquidity than other airlines, because a big chunk of our revenue stream.

Speaker Change #105: Is very predictable between our cargo and charter businesses.

Speaker Change #105: <unk>.

Speaker Change #105: I hesitate to throw out an exact minimum liquidity number, but it's below well below where we're at today.

unknown: You know, there's really not that much of a need to build liquidity as we head into the cargo ramp because there's really no CapEx required, or very, very little CapEx required. You know, it'll be continuing the stream of pilot hiring that we're doing and then a reallocation of some resources from our scheduled service into the cargo business. So there's not really any kind of a significant liquidity need there.

Speaker Change #105: Yeah.

Speaker Change #105: There is really not that much of a need to build liquidity as we head into the cargo ramp because theres really no capex required or very very little capex required.

Speaker Change #105: It'll be continuing the stream of pilot hiring that we're doing and then a reallocation of some resource from our scheduled service into the cargo business. So theres not really any kind of a significant liquidity need there that'll be a liquidity positive event for us because of the improved profitability of the new cargo flying.

unknown: That'll be a liquidity positive event for us because of the improved profitability of the new cargo flying. You know, to your second question, you know, we've done well over 100 million in share buybacks. And we'll sort of continue to look at our free cash flow profile. We're paying back a lot of debt, and our debt balances are coming down pretty quickly. So this is something that's always on our plate, and we'll probably revisit and take another look at it as we move through this year and early into next.

Speaker Change #105: To your second your second question.

Speaker Change #114: Done well over $100 million in share buybacks, and we will sort of continue to look at our free cash flow profile are we're paying back a lot of debt in our debt balances are coming down pretty quickly.

Speaker Change #105: So this is something that's always on our plate and we'll probably revisit and taken them to look at as we move through this year and early into next just.

unknown: One more thing on that Duane, typically airlines require a lot of working capital to transition new fleets because of crew training and things like that. I just want to remind everybody that our pilots do all the flying that we do across all three segments from a single base. So, there's really no incremental operating costs associated with the transition.

Speaker Change #105: One more thing on that Duane.

Duane <unk>: Typically airlines require a lot of it.

Speaker Change #113: Working capital to transition new fleets because of crew training and things like that I, just want to remind everybody that our pilots do all the flying that we do across all three segments from a single base. So.

Speaker Change #124: There's really no incremental operating costs associated with the transition.

Speaker Change #113: <unk>.

unknown: Yeah, that's, that's very clear. Good reminders. And just to follow up on charter.

Speaker Change #113: Okay.

Speaker Change #120: That's very clear good reminders and just just to follow up on charter.

Speaker Change #117: How do you view the opportunity set now and maybe just operationally.

Speaker Change #115: What is the lead time, you need to kind of tilt harder into that segment versus maybe scheduled service is that are you looking one to two quarters out or can you react to opportunities closer and thanks for taking the questions.

unknown: Hey Duane, why don't I start it and then I'll turn it over to Grant. So there it is.

Speaker Change #117: Hey, Duane when I started and I'll turn it over to grant.

unknown: So Charter comes in kind of two flavors. One is contracted Charter flying, which is under long-term agreements. It's about seven aircraft worth of flying that we do that's related to that. And, essentially, it's us being an airline for someone else. And it's the same aircraft that our passenger scheduled service fleet operates, so it's interchangeable, but it's very dependable. Volumes, and Profitability And then there's a big section of charters that's ad hoc, which is booked relatively close in, high margin flying, and mostly a way for us to allocate surplus capacity to profitable flying.

Grant: So the charter comes in two flavors, one is contracted charter flying which is under long term agreements it's about seven aircraft.

Grant: Worth of flying that we do that's related to that and essentially it's us being an airline for someone else.

Grant: And it's the same aircrafts that are passenger scheduled service fleet operates so it's interchangeable, but it's very dependable.

Grant: Volumes and profitability and then Theres, a big section of charters this ad hoc which is.

unknown: And that's the domestic military market that we participate in, and a significant amount of sports charters that we do for predominantly NCAA sports and major league soccer. So those are a little bit harder to predict because it's close in, but we're pretty bullish on them going into this fall as we've continued to expand that market. Grant, any other color in that? Yeah, the only thing I would add would be even in the second.

Grant: Booked relatively close in high margin flying and mostly a way for us to allocate surplus capacity into profitable flying and thats the domestic military market that we participate in.

Grant: A significant amount of sports charters that we do for predominantly NCAA sports and major League soccer.

Grant: So those are a little bit harder to.

Grant: To predict because it's close in.

Grant: But we're pretty bullish on it going into this fall as we've continued to expand that market.

Speaker Change #120: Granted any other color on that yes, the only thing I would add would be even in the second quarter. When we really were biased towards scheduled service growth using up what we thought were pretty much all of our crew resources, we still were able to pivot pretty significantly as Jude mentioned to those mills.

unknown: In the second quarter, when we really were biased towards scheduled service growth using up what we thought were pretty much all of our crew resources, we still were able to pivot pretty significantly, as Jude mentioned, to those military trips and those close-in ad hoc trips. And as we look towards the back half of the year, we're going to be very aggressive. There's really no waiting. Those requests are coming to us, and the team's very poised to go out.

Jude Bricker: Military trips and those close in AD hoc trips.

Speaker Change #128: And as we look towards the back half of the year, we're going to be very aggressive. There is really we don't have to wait those requests are coming to us and the teams very poised to go out.

unknown: And where there's an opportunity, where we can do it profitably, we're going to do it. And we have such a good reputation in the marketplace that people come to us pretty quickly when we have that capacity. And when things do get tight, we sort of take that capacity off, but we can turn it on very, very quickly, which we're doing right now.

Speaker Change #119: And where there is an opportunity where we can do it profitably.

Speaker Change #119: Going to do it and we have such a good reputation in the marketplace.

Grant: People come to us pretty quickly when we have that capacity and when we do we think do get tight we sort of take that capacity that we can turn it on very very quickly, which we're doing right now.

Speaker Change #122: Okay. Thank you.

Grant: Okay.

Speaker Change #120: Thank you.

Scott Group: Our next question will come from Scott Group from Wolfe. Your line is now open.

Grant: Our next question will come from Scott Group from Wolfe. Your line is now open.

unknown: Hey, thanks. Good morning, guys.

Scott Group: Hey, Thanks, good morning, guys.

Scott Group: What's the capacity you're talking about.

Speaker Change #119: Are you in the camp.

Scott Group: September RASM inflection and then is there in your mind is there a risk. This is just like a head fake september's off peak in capacity starts to Reaccelerate.

Speaker Change #124: In Q4.

Speaker Change #130: No I think we're seeing a structural change in the growth rate I think we saw a reallocation of capacity into the domestic leisure market in 'twenty, two and then capacity chase that demand into big market connectivity Trans Atlantic the Midwest.

Speaker Change #132: <unk> was kind of late to get those capacity growth.

Grant: Reallocations from post Covid environment, and we saw growth rates peak in July.

Grant: And everybody is selling out through April now, so I feel fairly confident that our peak winter.

Grant: Schedule will show the kind of profitability that we're all expecting as we move into this winter. So no I don't think I don't think Thats the case.

unknown: No, I think we're seeing a structural change in the growth rate, and I think we saw a reallocation of capacity into the domestic leisure market in 22 and then capacity chased that demand into big market connectivity, transatlantic. The Midwest was kind of late to get those capacity growth reallocations from the post-COVID environment, and we saw a growth rate

Speaker Change #129: September for US September piece is always yes.

unknown: It's peak in July and you know, everybody's selling out through April now, so I feel.

Speaker Change #127: So Democrats is always challenging so when we cut down capacity, obviously, we're able to identify.

Grant: The flights down to the very flight level that arent going to make.

Grant: Positive contribution and cut those out so.

Grant: We're expecting a pretty good September all things equal.

Grant: Because we've had the time to prepare under the current environment, which is substantially different than when we planned the year out.

Speaker Change #124: Thank you can you just remind us the timing of the aircraft ramp with with Amazon and then you had a comment that.

Grant: We're seeing a partial impact of the higher rates in June, but we don't see the full impact until the second half of next year can you just.

Speaker Change #138: Talk about that.

Speaker Change #132: Yes so.

Speaker Change #140: Can't go into the details on how the rates came in but basically we got a a partial increase in rate. When we signed the deal. So really that didn't have any impact on our numbers until until June so the effect of the second quarter of the new Amazon races.

Grant: Small.

Grant: But there is this piece that came in when we signed the deal and then additional increases as the aircrafts come in in the aircraft right now we expect to start arriving in March.

Grant: Of 2025, and then to come in relatively quickly so that by the third quarter Theyre kind of all onboard here now thinks can move left to right a little bit but.

Grant: That's the that's the instruction, we've been given and sort of the path that we're on.

Grant: And so we still get like this.

Grant: I guess for lack of a better word like two bites of the Apple next year, where we get the.

Grant: The Q1 benefit of scheduled.

Grant: Then we got the.

Grant: Cargo ramp in.

Grant: The rest of the year, yes, yes, that's exactly right. So.

Grant: Well.

Grant: Look we're really bullish on next year and part of the reason is what you just said so we're going to be able to continue allocating all of our resources to scheduled service services.

Grant: As much as necessary to schedule service in Q1, which obviously is the biggest quarter for us by far and then transition very smoothly as things slow down for us into the into the cargo business more so it kind of works out really well.

Grant: Okay.

Speaker Change #143: Thank you guys.

Scott Group: Thanks Scott.

Speaker Change #140: Thank you.

Speaker Change #147: Our next question will come from Michael Lindenberg from Deutsche Bank. Your line is open.

Michael Lindenberg: Oh, Yeah, Hey, good morning, everyone.

unknown: [inaudible] The schedule will show the kind of profitability that we're all expecting as we move into this winter. So no, I don't think...

Michael Lindenberg: When I look at.

unknown: Now, I don't think I don't think that's the case. September for us.

Michael Lindenberg: You are scheduled through the winter you talk about 55 or more than 55 cities that you are going to serve nonstop from Minneapolis.

Speaker Change #134: When I when I think about what youre going to serve.

Michael Lindenberg: Maybe what you were serving a year ago. It does seem like there is some markets that you have pulled out of curious what is.

Speaker Change #147: The common denominator in some of those markets was it just.

Speaker Change #147: They didnt ramp up well data in our company maybe some of the charter flying that you did maybe there was sort of part of the package.

Speaker Change #134: Or it's just the competitive response anything we can take away from that.

unknown: Yeah, September for us is always challenging. So when we cut down on capacity,

Speaker Change #133: Well first.

unknown: Obviously, we're able to identify, you know, the flights down to the very flight level that aren't going to

unknown: to the very slight level that aren't going to make, you know, a positive contribution and cut those out. You know, we're expecting a pretty good September, all things equal, because we've had the time to prepare under the current environment, which is substantially different than when we planned the year out.

Speaker Change #141: Seasonal markets that to happen across our network.

Speaker Change #137: That are going to be repetitive every year and nearly everything every market works from Minneapolis.

Speaker Change #137: In June and July nearly all of our winter.

Speaker Change #144: We need more capacity in winter.

Speaker Change #137: And nearly everything works I think everything works.

Speaker Change #133: In that period of time, as well, but they're very different networks summer to winter.

Speaker Change #137: Okay I think the thing to watch is as we go into summer 'twenty five some of our markets will need to be suspended through summer 'twenty, five and not come back into into the network until future years, and thats because of reallocation into cargo.

Grant: Our winter network will be intact, yes.

Speaker Change #140: Okay. That's helpful. And then just secondly, as you ramp and bring on the additional airplanes and you talked about sort of re re allocating resources, where are we on on pilots and staffing.

Speaker Change #140: First officers versus captains should we see any sort of teething issues as we as we ramp up into 2025 with the additional airplanes coming on for cargo et cetera. Thanks, Thanks for taking my questions.

Grant: Yes. This is Greg Mays, I think with our with regard to pilots, we've been able to allocate resources.

Speaker Change #148: You'll not be constrained by by pilots or staffing really generally.

Grant: So as we look out into 2025, we don't see any change to that we see overall industry hiring is way down so things look good for us we still we still would love to have more captains upgrade but at this point in time, that's not constraining our growth we feel really really.

Grant: As Dave said bullish about 2025.

Speaker Change #152: Great. Thanks.

Speaker Change #145: Thank you.

Speaker Change #139: And as a reminder to ask a question. Please press star one again Thats star one to ask a question.

Speaker Change #143: One moment for our next question please.

Grant: Yeah.

Grant: And our next question will come from Tom Fitzgerald from TD Cowen Your line is open.

Tom Fitzgerald: Hi, everyone. Thanks for the time can we just go back to capital allocation again.

Tom Fitzgerald: Given everything with the business is going and how cheap the stock is right now why not issue that instead of paying down debt and use the proceeds to buy back your stock.

Speaker Change #153: Look we've sort of considered all different avenues here that it isn't that isn't sort of cheap as it is it could be at this point.

Speaker Change #143: We're kind of looking at everything.

Grant: We're sort of making capital allocation decisions here not just for the next <unk>.

Speaker Change #143: Three to six months, but for the long term, we want to continue to operate with a conservative balance sheet.

Grant: And sort of loading up with more debt right now to buy back stock is probably not something that we're going to do in the short term.

Speaker Change #147: Okay Fair enough. That's helpful. And then just like longer term kind of what are we kind of get past 2026, just how are you thinking about the network and whether you need another focus that he'd beyond Minneapolis. Thanks again for the time.

Tom Fitzgerald: Hey, Tom.

Tom Fitzgerald: Theres not a lot of growth opportunities outside of Minneapolis other than the stuff that we already have in the schedule like.

Speaker Change #147: Texas origination down in Mexico, and Caribbean markets in the summertime.

Speaker Change #144: In the past we've had a lot of success expanding our Midwest footprint into origination markets around Minneapolis, We also had a nice business in 2019 flying.

Grant: Hawaii, Hawaii is not a great place to be right now so with the yield environment Theres, not theres, nothing thats obvious and urgent.

Grant: For us to move into and so I think what we are.

Grant: Quite frankly, what we're going to be waiting on is some.

Grant: Of our competitors to go through some challenging times and free up some opportunity for us and Thats why we want to think about having.

Grant: Some powder on the balance sheet and.

Grant: And just being able to be dynamic to be able to reallocate capacity when it presents itself, which I think is going to be an opportunity that's difficult to predict as we sit here today.

Grant: Yeah.

Grant: The best thing for us in the near term. It is as we talked about cargo in charter opportunities.

unknown: Yeah, so I can't go into the details on how the rates came in. But basically, we got a partial increase in rates when we signed the deal. So really, that didn't have any impact on our numbers until June. So the effect of the second quarter of the new Amazon rates is very small.

Dave: Yes. This is Dave.

unknown: But there's this piece that came in when we signed the deal and then additional increases as the aircraft come in. And the aircraft right now, we expect to start arriving in March of 2025 and then to come in relatively quickly. So by the third quarter, they're kind of all on board here. Now, things can move left to right a little bit, but that's the instruction we've been given and sort of the path that we're on.

Dave: Completely agree with what you just said 25 for US is a year of integrating these new cargo aircrafts, taking advantage of of the economics of that new deal and then we'll look at the landscape in 'twenty six.

Dave: This growth opportunities there can be growth opportunities here growth opportunities elsewhere, but we'll see what the landscape looks like in 'twenty six and beyond that.

Speaker Change #156: Given the state of some others, we expect it to be a different landscape than that it looks like at this particular minute.

Dave: And does that conclude your questions Mr Fitzgerald.

Mr Fitzgerald: Yes, thanks, Sir thanks, very much for the time everyone.

Speaker Change #160: Thank you thanks, Tom one moment for our next question.

Speaker Change #147: And we do have a follow up from Scott Group from Wolfe. Your line is open.

Scott Group: Hey, guys. Thanks for the follow up.

Grant: Just.

Scott Group: I wanted to make sure we're thinking about full year 25 rate just with the moving pieces can you just remind us how to think about how much.

Speaker Change #154: Scheduled ASM are going to be down and then.

Speaker Change #152: What you think a full year sort of block hours for cargo.

Speaker Change #157: Yeah. So.

unknown: And so we still get like this. I guess, for lack of a better word, like two bites of the apple next year where we get the Q1 benefit of scheduled and then we get the cargo ramp and the rest of the year. Yeah, yeah.

Speaker Change #164: Let me just describe it this way so basically we are going to be taking these cargo aircraft in and that is going to have sort of the first call on resources that we have here, particularly on the pilot front.

unknown: Yeah, yeah, that's exactly right. So You know, we're, look, we're really bullish on next year, and part of the reason is what you just said. So we're going to be able to continue allocating all of our resources to scheduled service, you know, as much as necessary to schedule service in Q1, which obviously is the biggest quarter for us by far, and then transition very smoothly as things slow down for us into the cargo business more. So it kind of works out really well.

Grant: Then as we have remaining resources available, we'll allocate that between scheduled service in charter depending on where the opportunity is so part of part of this depends on.

Scott Group: Thank you guys. Thanks, Scott.

Speaker Change #152: On exactly where we sit from a from a pilot availability standpoint, frankly going into 'twenty five.

Speaker Change #156: Our current outlook is likely to be down high single low double digits.

Speaker Change #157: On a block hour basis, or sorry on an ASM basis for scheduled service, but that could move left or right depending on exactly where we sit from a from a pilot perspective, I think we had the block hour growth for cargo next year.

Grant: Okay.

Michael Linenberg: Thank you. Our next question will come from Michael Linenberg of Deutsche Bank. Your line is open.

Speaker Change #166: Give me one second here.

Speaker Change #159: Yes, I don't know that 25 number right in front and we can follow up with you on that but it would obviously be significance, where it since we're bringing in since we're bringing in eight new aircraft.

Grant: But the size of our scheduled service in charter business is going to be driven by.

unknown: Well, first, there's there's.

Grant: Resource availability, particularly pilots.

Grant: Okay.

Speaker Change #166: And any thoughts on what that mix shift should mean from a.

Speaker Change #159: Just total cost or unit cost perspective.

Speaker Change #166: Probably a little premature to sort of talk.

Grant: Talk about that as to what's going to happen with CASM next year precisely.

Speaker Change #159: The cargo business is going to consume some.

Speaker Change #159: Some of our resources here. So this is going to be some additional allocation of overhead and other things to the cargo business. So that makes just isn't sort of straightened out quite yet.

Grant: Yes.

Grant: Just.

Speaker Change #159: Yes, sorry, just quickly, yes, I think as.

Grant: As we sit right now we're expecting the cargo segment to be up, let's say, 60% to 63% and block hours in 2025 over 2024.

Speaker Change #169: Hopefully so it doesn't sound like anything from what you guys laid out for US in June when you first made this announcement.

Speaker Change #159: Sounds like anything is really changing.

Speaker Change #159: Yes.

Speaker Change #168: Nothing is really changing significantly I'll tell you the only trend that we're seeing a little bit is maybe a little bit of improved pilot availability, which would say may be we could be a little bit bigger next year from a scheduled service perspective on the call I said down 10% to 12 I think.

Speaker Change #168: <unk> percent and the scheduled service segment, our latest numbers have is more like high single digits.

Speaker Change #179: So that's the number that's kind of moving left and right right now, but the cargo delivery schedule of the aircraft. They talked about on the last call is still relevant and important that you called out the seasonality of the growth is really beneficial for us.

Grant: The first quarter will be intact, and we will see at.

Grant: At least mid single digit growth.

Grant: January February March and then as we move into the year and start taking cargo airplanes, that's where we'll see a drawdown of our <unk> business.

Grant: Okay.

Speaker Change #160: Thank you guys appreciate it.

Scott Group: Thanks Scott.

Speaker Change #166: Thank you.

Grant: And our next follow up comes from Michael Lindenberg from Deutsche Bank. Your line is open.

Michael Lindenberg: Oh, Yeah, Hey, thanks for the follow up but just a quick as we think about composition of revenue do we get to like 35 or 40% of your revenue is cargo.

Speaker Change #166: <unk> charter for next year or am I, just too high.

Speaker Change #180: I'm just trying to get them.

Speaker Change #166: I think that number is probably not unrealistic for 'twenty six.

Michael Lindenberg: But that sort of 35, plus number in <unk> and 'twenty.

Speaker Change #159: 25 is that going to be that high I want to point out.

Grant: Block hours, we might get something like that.

Speaker Change #159: Towards the end of next year and going into the subsequent year, but.

Speaker Change #168: The density of of revenue is a lot higher.

Speaker Change #186: <unk> charter in scheduled service because of fuel pass through.

Michael Lindenberg: And some of the costs too so that the revenue per block hours, a lot lower and cargo just because of the way. The accounting is treated for fuel expenses that we don't pay and things like that.

Speaker Change #187: Yes, I'm just thinking about how that's going to impact your costs and also your fuel bill since.

Speaker Change #166: A big chunk of your business it is going to be this pass through okay now.

Speaker Change #159: Helpful. Thank you.

Martin: Thanks Martin.

Speaker Change #176: Thank you.

unknown: [inaudible]

Speaker Change #176: And I am showing no further questions in our phone lines I'd now like to turn the conference back over to Jude Bricker for any closing remarks.

unknown: , , , , , , , , , , , , to the network until future years, and that's because of reallocation into cargo. But our winner network will be intact. Okay, that's helpful. And then just secondly, as you ramp and bring on the

unknown: Okay, that's helpful. And then, just secondly, as you ramp up and bring on the additional airplanes and you talk about, you know, sort of reallocating resources, where are we on pilots and staffing, you know, first officers versus captains? Should we see any sort of teething issues as we ramp up into 2025 with the additional airplanes coming on for cargo, etc.?

Speaker Change #183: Thanks for your interest guys three big points capacity growth has peaked and we feel that it's going to be a constructive fare environment.

unknown: Thanks. Thanks for taking my question. Yeah, this is great.

unknown: by pilots or staffing really generally. So as we look out into 2025, we don't see any change to that. We see overall industry hiring is way down.

unknown: So things look good for us. We still, you know, we still would love to have more captains upgrade. But at this point in time, that's not constraining our growth. We feel really, really, as Dave said, bullish about 2025.

Operator: One moment for our next question, and we do have a follow-up from Scott Group from Wolfe. Your line is open. Hey, guys, thanks for the follow-up.

Tom Fitzgerald: Hi everyone, thanks for the time. Can we just go back to capital allocation again and, you know, given everything about where the business is going and how cheap the stock is right now, why not issue debt instead of paying down debt and use the proceeds to buy back your stock?

unknown: Let me sort of just describe it this way. So, basically, we're going to be taking these cargo aircraft in, and that is going to be sort of the first call on the resources that we have here, particularly on the pilot front. Then, as we have remaining resources available, we'll allocate that between scheduled service and charter, depending on where the opportunity is. So part of this depends on exactly where we sit from a pilot availability standpoint. Frankly, going into twenty-five, you know, our current outlook is likely to be down high, single, low, double digits on a block hour basis, or sorry, on an ASM basis for scheduled service, but that could move left or I think we'll have block hour growth for cargo next year. (Inaudible) Give me one second here.

unknown: Look, we've sort of considered all different avenues here. Debt isn't as cheap as it could be at this point. We're kind of looking at everything. You know, we're sort of making capital allocation decisions here, not just for the next. Three to six months, but for the long term, we want to continue to operate with a conservative balance sheet and sort of load up on more debt right now to buy back stock. It's probably not something that we're going to do in the short term.

unknown: and any thoughts on what that mixed shift should mean from a total cost or unit cost perspective?

unknown: There's not a lot of growth opportunities outside of Minneapolis, other than the stuff that we already have in the schedule like Texas origination down in Mexican Caribbean markets in the summertime. In the past, we've had a lot of success expanding our Midwest footprint into origination markets around Minneapolis. We also had a nice business in 2019 flying Hawaii.

Speaker Change #166: Moving to the end of the year.

unknown: Probably a little premature to sort of talk about that as to what's going to happen with CHASM next year precisely. You know, the cargo business is going to consume, you know, some of our resources here. So there's going to be some additional allocation of overhead and other things to the cargo business. So that mix just isn't sort of straightened out quite yet. Yeah, sorry, just quickly. Yeah, I think as we sit right now, we're expecting the cargo segment to be up, let's say, 60 to 63% in block hours in 2025 compared to 2024.

unknown: of our competitors to go through some challenging times and free up some opportunities for us. And that's why we want to think about having them.

unknown: Hopefully, so it doesn't sound like anything from what you guys laid out for us in June when you first made this announcement doesn't sound like anything's really changed. Nothing's really changing significantly. I'll tell you, the only trend...

unknown: Some powder on the balance sheet and just being able to be dynamic to be able to reallocate capacity when it presents itself, which I think is going to be an opportunity that's difficult to predict as we sit here today. The best thing for us in the near term is, as we talked about cargo and charter opportunities. Yeah, this is Dave.

Speaker Change #176: Our block hour growth will continue, but we're going to shift into the cargo predominantly.

unknown: Nothing's really changing significantly. I'll tell you the only trend that we're seeing a little bit is maybe a little bit of improved pilot availability, which would say, maybe we could be a little bit bigger next year from a scheduled service perspective on the call. I said, down 10 to 12, I think a percent in the scheduled service segment. Our latest numbers are more like high single digits. So that's the number that's kind of moving left and right right now.

Dave Davis: I completely agree with what you just said. Twenty-five for us is a year of integrating these new cargo aircraft and taking advantage of the economics of that new deal. And then we'll look at the landscape in 26. You know, there are growth opportunities. There could be growth opportunities here, growth opportunities elsewhere, but we'll see what the landscape looks like in 26 and beyond. I think, given the state of some others, we expect it to be a different landscape than it looks like at this particular minute.

Tom Fitzgerald: Thank you. Thanks, Tom.

Michael Linenberg: And our next follow-up comes from Michael Linenberg from Deutsche Bank. Your line is open.

unknown: Unknown Speaker.

unknown: I think that number is probably not unrealistic for 26. But, but that sort of 35 plus number and 25 is not gonna be that high. I want to point out that Block hours, we might get something like that. Towards the end of next year and going into the next subsequent year, but the density of revenue is a lot higher in charter and scheduled service because of fuel passes.

Speaker Change #173: And we're really bullish on our free cash flow production as we have already acquired the growth.

Operator: And I am showing no further questions on our phone lines. I'd now like to turn the conference back over to Jude Bricker for any closing remarks.

Speaker Change #173: For the next several years.

Speaker Change #173: And lastly, I'll end has just been so proud to be part of this team that executed so well through such challenging period.

Speaker Change #175: This interruption the whole industry had to deal with was with severe.

Speaker Change #173: For our frontline employees and they executed beautifully and I'm, just so proud of them.

Jude Bricker: Thanks for your interest, guys. Here are three big points.

Speaker Change #159: Thanks, and we'll talk to you guys next quarter and I appreciate your interest.

Jude Bricker: Capacity growth has peaked, and we feel that it's going to be a constructive, fair environment moving through the end of the year. Our block hour growth will continue, but we're going to shift into cargo predominantly, and we're really bullish on our free cash flow production as we have already acquired the growth for the next several years. And lastly, I'll end by just being so proud to be part of this team that performed so well through such a challenging period.

Jude Bricker: This IT interruption that the whole industry had to deal with was severe for our frontline employees, and they executed beautifully, and I'm just so proud of that. Thanks, and we'll talk to you guys next quarter. Appreciate your interest.

Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

Speaker Change #169: Thank you. This concludes today's conference call.

Speaker Change #169: Thank you for your participation you may now disconnect everyone have a wonderful day.

Q2 2024 Sun Country Airlines Holdings Inc Earnings Call

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