Q3 2024 Sun Country Airlines Holdings Inc Earnings Call
Daniel: Welcome to the Sun Country Airlines third quarter, 2024 earnings call. My name is Daniel and I will be your operator for today's call. At this time, we'll participants aren't a listen only move.
Daniel: After the speaker's presentation, there will be a question and answer session.
Daniel: Class of Questioner in the session you'll need a press star, one-one on your telephone. You will then hear an automated message advising your hand as a raised.
Daniel: To withdraw your questions, let's press star 11 again.
Speaker Change: Please be advised that today's conference is being recorded. I will now turn the call over to Chris Allen, director of Invest Relations. Mr Allen, you may begin.
Chris Allen: Thank you. I'm joined today by Jude Bricker, our chief executive officer, Dave Davis, President Chief Financial Officer and a group of others self-answer questions.
Chris Allen: For again, I'd like to remind everyone that during this call the company made certain statements that constitute for the local statement.
Chris Allen: Corey Mark today may include Board-looking statements which are based on management's current beliefs, expectations, assumptions, and subjects of risk and uncertainty. Actually, results may differ with your link. We encourage you to review the risk factors and cautionary statements that line in our earnings release on our most recent SEC five.
Chris Allen: We assume no obligation to update any four looking statement you can find our third quarter 2024 earnings-pursely to the investor relations portion of our website at IR.unkub.com So that's that I'd like to turn it over to you
Speaker Change: Thanks Chris, good morning everyone, happy Halloween.
Speaker Change: Our diversified business models unique in the airline industry, due to the predictability of our chartered cargo business, is we're able to deliver the most flexible schedule service capacity in the industry. The combination of our schedule flexibility and low fixed costs model allowed us to respond to both predictable leisure demand fluctuations.
Speaker Change: and Exogenous Industry Shocks. We believe due to our structural vennages, we'll be able to reliably deliver industry-leading profitability throughout all cycles.
Speaker Change: Domestic industry capacity growth peak in June, almost 7% in the growth rate has been slowing ever since. But across our network industry capacity reached a peak growth rate of 12%.
Speaker Change: by January Domestic Industry Capacity will be flat year and year and will be down across our network. Many airlines are earnings calls have focused on a rationalization of capacity.
Speaker Change: Clearly much of the capacity that other airlines added across our network was law-making and has been removed. All the wilds and country continues to expand and produce profits and healthy cash flows.
Speaker Change: selling unirrevenous or now positive year on year for all future selling months. Floan unirrevenous will lag, but we now expect fourth quarter-trassom year on year to be around flat. Based on industry schedules that remain bullish on unirrevenous trends in the next year.
Speaker Change: Translating Schedule Unit Revenue Trends and Amargins, we have positive trends in charter yields and cargo yields, both of which are contractual.
Speaker Change: We have mostly path to post-COVID inflationary pressures in our expecting only modest ex-fuel unit cost, increases going forward and fuel is down.
Speaker Change: As shown in our four-q guide, we believe we'll likely show a margin expansion and based on current inputs I remain bullish into 2025 as well.
Speaker Change: Another comment topic on airline 3Q calls has been challenges with aircraft availability in OEM deliveries
Speaker Change: and AOGs caused by OEMs. Again, to draw distinction with our business, all the aircraft supporting our fleet growth for 2025 and 2026 are currently in operation with other carriers. They are either on our balance sheet as least out until they are to redelivered or committed through our cargo program.
Speaker Change: Further, barring costs are a common topic, just to remind everyone we continue to produce free cash flow and are able to self fund our modest cap extra requirements. As such, our debt levels continue to decline even as we grow.
Speaker Change: As we ride these positive trends this management team will primarily be focused on operational improvements of service delivery. This past summer was very challenging operationally.
Speaker Change: as we discussed in the past.
Speaker Change: and only to cap the season off with hurricanes in a major IT disruption. But since October August 1st, we have achieved the 99.5 controlable completion factor. We have an incredible team that navigates these challenges and I'm proud to be part of it. But that'll turn over today.
Speaker Change: Thanks, Jude. We're pleased to report that two-three was our ninth consecutive quarter of a profitability and year to date. Sun Country has among the highest margins in the industry.
Speaker Change: Both our cargo segment and our charter line of business continue to produce solid growth, which is partially offset the capacity driven pricing pressure we've experienced in the scheduled service business this year.
Speaker Change: As industry capacity continues to rationalize, we're seeing a stronger pricing environment in Q4 and in the Q1 of 25.
Speaker Change: Sun Country is rapidly matched our capacity with market demand as Q3 scheduled service ASM growth felt to 5.8% year over year versus more than 18% in the second quarter.
Speaker Change: We're planning this growth to slow further in Q4 with scheduled service ASM growth expected to be slightly higher than 3% year over year. I mean, I'll turn to the specifics of Q3.
Speaker Change: First to revenue in capacity. Third quarter total revenue was 249.5 million, which is roughly flat with the third quarter.
Speaker Change: 23
Speaker Change: Revenue for our passenger segment, which includes our scheduled service in charter businesses, about 3% year over year.
Speaker Change: scheduled service revenue declined 5.9% driven by an 11.1% decline in scheduled service trasm. The quarter was impacted by industry over capacity the crowd strikeoutage in Hurricane and Florida.
Speaker Change: We rapidly reduced our scheduled service capacity as the quarter proceeded with July growing 12% versus prior year but September shrinking by 10%.
Speaker Change: Give him a length of our booking window. It generally takes a couple of quarters to fully realize the impact of capacity changes on flown fair levels.
Speaker Change: We feel confident that our current capacity allocation for Q4 and Q125 matches customer demand.
Speaker Change: Q4 scheduled service, Trasm is expected to be flat with Q4 23 levels and total trasm, which includes our charter business, is expected to be up versus last year by low single digits.
Speaker Change: Charter revenue in the third quarter grew 7% to $51 million, which was a new quarterly high percent country, partially off-setting scheduled service weakness.
Speaker Change: Driving this result?
Speaker Change: was a 1.7% increase in charter block hours and a 5% improvement in revenue per block hour. Charter unit revenue improvement resulted from recently renegotiated contractual rate increases and a better mix of flying.
Speaker Change: Charter Unit Revenue Growth would have been significantly higher, had lower fuel prices not reduced the fuel cost reimbursement we received from our charter customers.
Speaker Change: Over 80% of our charter revenue during the quarter came from flying down under long-term agreements.
Speaker Change: for our cargo segment.
Speaker Change: Revenue grew by 11.9% in Q3 to 29.2 million, which was also on all-time quarterly high.
Speaker Change: This growth came despite a 3.6% decrease in cargo block hours, resulting from aircraft and heavy check and hurricane driven flight cancellations in the southeast.
Speaker Change: Cargo Revenue for Block Hour was up 16% driven by the impact of a portion of the rate changes implicit in our extended Amazon agreement as well as annual rate escalations.
Speaker Change: We continue to expect cargo flying to inflict sharply upward in 2025 as we take on an anticipated eight additional freighter aircraft throughout the year.
Speaker Change: In the segment reporting table included in our Q310Q, you'll see that cargo margins improved significantly versus last year. As a reminder, the segment reporting in our quarterly filings includes allocated corporate overhead.
Speaker Change: The revised Amazon Contract rates will continue to escalate as we receive additional aircraft and will not be in full effect until the second half of 2025.
Speaker Change: Turning now to costs, we continue to remain well disciplined as Q3Casm declined 1.9% vs. 3rd quarter of 2023, while adjusted the cost of the Q3Casm increased 3.7%.
Speaker Change: This adjusted Kazum increase was a largely driven by our slowing growth during the quarter.
Speaker Change: Ground handling expenses grew 23.3% year over year, driven by more flying volume, higher outsourced ground handler costs, and one time credits incurred in Q323, which didn't repeat this year.
Speaker Change: Regarding landing fees and airport grants, we continue to see pressure on cost due to the rolloff of COVID-19 or relief payments that airports have been using to minimize rate increases.
Speaker Change: is contributing to a 14.5% increase in landing fees and airport run expense during the quarter. As we move into Q4, the slowing growth in our schedule service business likely to continue to put some pressure on a adjusted
Speaker Change: Are we getting our balance sheet or total liquidity at the end of the third quarter was $165 million. As of October 30th, total liquidity stood at approximately 184 million.
Speaker Change: Here to date we've spent 42.6 million on CapX and we anticipate 4 year 2020 4 CapX to be approximately $75 million.
Speaker Change: At this point we do not expect to purchase any incremental aircraft until we begin looking at the 127 capacity. We continue to generate strong free cash flow and our leverage remains low. We expect to finish the year with a net debt to adjust the debit dollar ratio of 2.3 times.
Speaker Change: Let me turn now to guidance. We expect fourth quarter total revenue to be between 250 and 260 million dollars on block our growth of 2 to 5%.
Speaker Change: We're anticipating our fuel cost for Galen to be $2.47 and for us to achieve an operating margin between 7 and 9%.
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: with that. I will open it up for questions.
Speaker Change: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced.
Speaker Change: To his Royal Requestion, please press star 11 again.
Speaker Change: In the interest of time we ask that you please lend yourself to one question and one follow it. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Wayne Penigwer with Evercore ISI or Linus O.
Speaker Change: Hey good morning thanks.
Speaker Change: So on cargo just with respect to the existing book of business that you're doing, have you hit full run rate on improvements on the existing.
Speaker Change: of Business at your doing or some of that still building and do you have any update on the timing of being for mental cargo aircraft, and a growth aircraft in 2025?
Speaker Change: Yeah, so um
Speaker Change: The answer is not all of the rate changes that are implicit in our new agreement or included in that number. So, the portion of them are in them.
Speaker Change: occurred this year, but there will be two more increases next year as the new aircraft deliver.
Speaker Change: We're really still looking to be on track for sort of the new cargo aircraft coming in, which would be late first early second quarter for the first one and then by late third early fourth quarter for the eighth one. So it's a rapid ramp.
Speaker Change: during the summer months of 2025 and by the end of the year of next year, 25, all the aircraft should be operating and the rate change you should be fully in place.
Speaker Change: Okay, great, that's very clear and then just on the um
Speaker Change: Seasonal Flying that you do in scheduled service.
Speaker Change: away from Minneapolis.
Speaker Change: Any new thinking you're approach there, any kind of new markets you're particularly excited about, and are the industry capacity adjustments that you're seeing, any different in those seasonal markets away from any apples?
Speaker Change: No manyapolis capacity, hey, do I have no manyapolis capacity? This primarily at Sun Country is summer issue.
Speaker Change: and we're going to be likely shrinking schedule service capacity summer of 25, first 24 because of the cargo induction.
Speaker Change: and David was talking about. So total block hours for the year will be up somewhere around 10% so we're still hiring and...
Speaker Change: and growing sort of in a control.
Speaker Change: but sustainable pace, but the mix will be different. So for some of next year, you know, our non-miniabless flying will be under some small pressures. So consider it may mostly flat. I wouldn't expect any new markets for some of our next year.
Speaker Change: and David Davis.
Speaker Change: Very clear. A substantial, we had a lot of market launches in the summer of 24 out of manyapolis predominantly. Some not manyapolis markets and some of those will need to be also need to be suspended in order to support the cargo of growth.
Speaker Change: Okay, got it. Thank you.
Speaker Change: Thank you and our next question comes from Robbie Schenker with Oregon Family, your line is open.
Speaker Change: Hi, good morning. This is Katherine On for Robby. Thank you for taking my question. Just a quick question on the update on the Oman aircraft that you've leaked as curious if those are going to continue to be on lease or if you're planning to add those to your fleet.
Speaker Change: Yeah, so here's where we stand with that. We will definitely be adding them to our fleet.
Speaker Change: Remember we have five aircraft which were scheduled to sort of.
Speaker Change: One of them, we delivered this year and go into service next year and then all of them in place.
Speaker Change: here at Sun Country by the end of next year. I think what's going to happen.
Speaker Change: given some of these OEM delays that are impacting other airlines, they want to extend leases and we're no exception to that so they want to extend the leases that we have to them.
Speaker Change: So I would say it's very likely that we extend at least a portion of those aircraft out into 2026 before they are redellivered, which works well for us, given the cargo growth we have next year.
Speaker Change: Got it and it's just a quick follow-up. I was curious what the Razum opportunity might be next year just given all this industry capacities and coming out of the market. It's curious how you think about the impacting some country.
Speaker Change: Hey, gather, we just loaded summer schedules, so there's no meaningful volume of bookings past April. As I mentioned in my comments earlier, the first quarter bookings remained strong. We're seeing positive trends you aren't here.
Speaker Change: and so to the extent that we have dated to look at in our own bookings beyond what other airline who bloated in their schedules, things that really positive, but that's only to label.
Speaker Change: Thank you and our next question comes from Brandon Oguansky with Barkley's Your Line is Open.
Brandon Oguansky: Hey, good morning, Jude, and Dave, thanks for taking the question. So should we still be thinking, should we still be thinking of double digit declines in your scheduled service, capacity or block hour flying next year? Let's still the bogey.
Speaker Change: Yeah, so let me give a brief update on that. We're still finalizing the 25 plan, but I think...
Speaker Change: So we originally thought that we were going to need to shrink our scheduled service business next year.
Speaker Change: You know, on the order of, let's say, 10% ish, I think given the situation with our pilots.
Speaker Change: Better availability than we thought that shrink in our scheduled service business is probably more like mid-single digits type number. Again, we're finalizing right now, but I think we'll be able to fly a little bit more on the passenger side next year than we had initially thought.
Speaker Change: You can look at loaded schedules and compare July, year on year, June, year on year and you'll see down high single digits as we give more clarity on the delivery timing of the cargo fleet.
Speaker Change: There's a little bit of an input that we is an unknown related to Captain Upgrades. You know, we're not going to shrink from there at all and we go higher. So we'll continue to add, get to service capacity as we become. As the segment makes becomes clear and pilot staffing becomes more clear.
Speaker Change: I appreciate that Jude and I guess there was a comment about...
Speaker Change: You're booking profile, it takes a few months
Speaker Change: for a capacity reductionist that starts showing up in higher affairs or higher real-life affairs, I guess. Is there anything you're changing given that capacity is likely to be down next year in the way you're holding inventory or pricing?
Speaker Change: I think that comment Brandon was really more around just sort of leisure passengers in the tendency to book earlier, particularly given the leisure passenger mix that we have so that they only point was
Speaker Change: You know, as I think you had mentioned, we're seeing nice upward trends.
Speaker Change: you know positive inflection year over year on a booked fair basis, but on a but that won sort of flow into flown revenue you know for a quarter or so because people buy an advance and maybe a little bit more in advance when they're leisure passengers.
Speaker Change: Okay, I'm just a thank you guys.
Speaker Change: Thank you, our next question comes from Michael Winberg with BB Your Line is Over
Speaker Change: Hi, this is Shannon Daryon from like, thanks for taking my question. Dave, maybe a couple for you with other revenue of 48% year over year, what drove that lower gencrease?
Speaker Change: I mean the biggest driver of that is our, that's where the, uh
Speaker Change: Revenue from Least Aircraft hits our piano.
Speaker Change: So the aircraft that we have out on lease, we get revenue for that's the line item words shown.
Speaker Change: Okay, got it. And how do you think about balancing to clean your free cash flows with sharebaud, else, and other uses? You know, just knowing that some shareholders may be limited to some extent from buying your stock, do you know your current market top in training liquidity?
Speaker Change: Yeah, so you know we had a sort of a share by back program going for a while.
Speaker Change: are free cash flow profile looks good. I would say we are very rapidly amortizing debt right now.
Speaker Change: and that will continue into the future. I don't really foresee us in a share-by-back mode for the next couple of months, but as we move into 25, our cash is building rapidly, we're going to revisit this. Now there's always just trade-off for us.
Speaker Change: We think our shares are really good investment at this price. So as we move later this year and the early next, we're going to revisit that.
Speaker Change: Just one thing on cash balances, the end of the third quarter is the annual trough in the seasonality of our cash balances. So when you look at the balance sheet on the cue, just keep that in mind.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Tom Fitzgerald with PD Kalin, your line is open.
Tom Fitzgerald: Thanks so much for the time everyone. Just going back to the health of the booking window, especially in Minneapolis with carriers like Jepp Lou Leaving. Could you touch on them like how seven day rolling yields have trended over the last six or eight weeks or so?
Speaker Change: Sure, I mean they're up. So seven day trailing.
Speaker Change: Fairs versus the same period last year are often every selling month as we look forward where we have any significant volumes. And, you know, I mean,
Speaker Change: Also, I just want to point out that the calendar shift for leisure carriers like ours that happened this year is really powerful.
Speaker Change: So it's a late Thanksgiving and a midweek Christmas and New Years. It's sort of the best set up that we could hope for combined also with the late Easter extends our winter travel season. So there's...
Speaker Change: A really weak period between Thanksgiving and Christmas, that's a relatively short period this year and then we have a long winter booking cycle because of a lady's turn. So there's some other background that's kind of helping the bookings like those things.
Speaker Change: but generally, you know, on our biggest thickest markets for this winter, we're all seeing, you know, in each of those markets we're seeing really positive trends. So that's Minneapolis Vegas, LA, Orlando, can't cune for Myers.
Speaker Change: December Bookings and West Florida haven been really affected by the hurricane challenges. So November will see an impact, but that appears to be over by the time the December schedule starts.
Speaker Change: and the other.
Speaker Change: That's super helpful, thanks so much and just as a follow up, once you get into 26, you know, you have the Amazon, the full, the comportment of the Amazon planes on board. How are you thinking about the seasonality of cargo block hours? Just kind of first half second half, any color they would be really helpful. Thanks again for the time.
Speaker Change: You know, if you go look at sort of the revenue profile of the cargo business, it varies.
Speaker Change: The main variance quarter to quarter honestly is just check volume, like what aircraft are going through check it any one time
Speaker Change: The business has a great advantage for us and that it's quite flat throughout the year and we expect that to be.
Speaker Change: continue a little bit harder flying during Amazon Prime.
Speaker Change: Periods but not that much. So it's a great, very stable business and we expect that to continue as all the aircraft are in.
Speaker Change: Thank you, as a reminder to ask a question, please press star 1-1 on your telephone. Again, that is star 1-1 to ask a question.
Speaker Change: and our next question comes from Scott Group with Wolf, your line has opened.
Scott Group: Hey, thanks. Good morning. I want to follow up on the cargo revenue per block hour. So I don't know if I see it's up 7% over last quarter or 16% over year.
Speaker Change: which is sort of in your mind is
Speaker Change: and more representative of the...
Speaker Change: of the new rate with Amazon. And I'll tell you what I'm trying to figure out. It sounds like there's two more increases coming. Should we think about these other two increases, similar and magnitude is what we just got? And I'm just trying to understand, ultimately, by the back half next year where this...
Speaker Change: and Reddly for Bach and go. Yeah, yeah, so.
Speaker Change: The 16% year over years got in it, you know, the annual right escalators and then the other number you mentioned.
Speaker Change: is quarter of a quarter. I would say that without being too precise, they quarter over quarter numbers more representative of one element of the new contractual race.
Speaker Change: We have two more increases coming next year which very roughly into a tality between the two should be roughly equivalent to the increase we saw.
Speaker Change: in the number you mentioned.
Speaker Change: I don't know how to get into detail contractual rates here, but by the end of 26 everything, sorry, end of 25 everything I'll be fully in.
Speaker Change: Okay, no, that is. That is what I want to bring up. Also, the raid structure has a fixed component and then a departure component and a block hour component.
Speaker Change: So, you know, the most subject to heavy check schedules has some impact on the per block hour rate that you're looking at in the financials. So there's not only rate changes, there's also a little bit of noise associated with other things.
Speaker Change: Yep, makes sense. You made a comment that...
Speaker Change: Fairs Bookter Positive
Speaker Change: Rathams, flat and cue four and people on leisure tenta book early, do you feel like...
Speaker Change: We should be able to, that does the fair positive translate into positive rasm and Q1 which is your big quarter or is it, has there been enough early booking where we may not see the rasm and flexion and Q1?
Speaker Change: Yeah, we're not going to get to win cute, but my point was only that
Speaker Change: You know, the inflection happened a few months ago so we were selling into a flown month October, November, December at a negative fair verse last year. Up until a few months ago, now it's positive, it'll take a while for total trasm.
Speaker Change: to catch up. But the further out in the schedule we look, the longer time we'll have of these positive booking trends and the more bullish we become.
Speaker Change: Okay?
Speaker Change: makes sense. And then just lastly, there's obviously a lot of mixed changes next year, schedule down, mid-single, digit, cargo growing. What's a good way to think about chasm next year?
Speaker Change: Yeah, so you know, that the plan is still sort of coming together. Casm's going to be up because the passenger business is down and the passenger business or what drives Casm obviously not the cargo business.
Speaker Change: You know, I would say we're looking at numbers. Let's just call it mid-single.
Speaker Change: did you up next year in Kazum, but that's subject to change here as we finalize our plan.
Speaker Change: Thanks for watching!
Speaker Change: Thanks God.
Speaker Change: Thank you, I'm showing you further questions at this time. I would now like to turn it back to Jude Bricker, Los Airmarks
Jude Bricker: Hey guys, thanks for your interest. Hope everybody has a great weekend. We're really excited about what we're seeing on booking trends, which we've talked about quite a lot this morning. And look forward to giving you another update in 90 days. Have a great day everybody.
Speaker Change: This concludes today's conference call.
Speaker Change: Thank you for participating, you may now disconnect.