Q2 2025 Sun Country Airlines Holdings Inc Earnings Call
Hello and welcome to the Sun Country, Airlines second quarter 2025 earnings conference call.
My name is Andrew, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode.
After the speaker's presentation, there will be a question and answer session to ask a question during the session. You will need to press star 1, 1 on your telephone. You will then hear an automated message. Advising your hand has been raised. So withdraw your question, please press star, 1 1 again, please be advised. That today's conference is being recorded, I will now turn the call over to Chris Allen director of investor relations Mr. Allen, you may begin.
Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer, Bill Charlesdale, our Chief Financial Officer, and a group of other team members to answer questions.
Before we begin, I'd like to remind everyone that during this call the company may make certain statements, that constitute for looking statements. Our remarks today may include 4 looking statements which are based on Management's current beliefs, expectations and assumptions are subject to risk and uncertainty actual results May differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release. And our most recent FCC filings, we assume no obligation to update any more looking statement, you can find our second quarter 2025 earnings press release on the investor relations portion of our website at IRS suncountry.com.
With that said, I would now like to call over to Jude.
Thanks Chris. Good morning everyone. We're pleased to report. Our 12th consecutive quarter of profitability, our diverse business models 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 exogenous industry, shocks. We Believe due to our structural advantages will be able to reliably deliver industry-leading profitability throughout all Cycles.
Our cargo Revenue once these additional aircraft reach mature utilization.
In the short term, this rapid growth has caused the pullback in our scheduled service volumes.
We are planning that these reductions will be recovered as we move.
I want to provide a little color as to the effects of this rapid cargo growth.
as it has on our
our 2q results reported yesterday, reflect the year-over-year trauma Improvement of 3 and a half percent.
Within the quarter, each month had a positive unit revenue. Performance may have the best year-on-year improvement, with trazim up 6.6%, which is consistent with our expectation that off-peak and shoulder periods are the most sensitive to capacity changes.
Importantly, the peak summer months of June, July, and August could absorb much more capacity than we were able to deliver, with little fall off in unit revenue and performance. That's the first point. The rapid growth of our cargo business has required us to pull back scheduled service during our peak summer months. Second, during peak months, unit revenue improvements won't overcome unit cost pressures of lower utilization. This situation will be most acute in July and therefore most impactful in Q3 2025.
We expect margins to expand, as we build back, our scheduled service, this line, that was productive, but that we had to cut.
With all this complexity in our current results, I think it's worthwhile to look into the future. When we get the cargo Fleet fully utilized recover, our passenger Fleet utilization and add in our own Fleet of leased out aircraft mostly 900s coming back to us through 2026.
That will be an in-service Fleet of 70, aircraft, 20, cargo and 50 passenger.
With current demand for our product and the current fuel prices. I expect the business to deliver roughly 1 and a half billion in Revenue, 300 million in ibida and 2 and a half dollars.
The timing of
that a certain, as we're challenged with the.
Right around the second quarter of 2027.
In the meantime, we'll be focused on deploying our free cash flow.
Our success in achieving, these results will be mainly dependent on our ability to continue to deliver a great product for 2q. I'm particularly proud that we delivered the industry's best. Completion fact there are most important operating metrics
Airline operations are a team event. I'm so proud of all our folks for delivering for our customers every day.
Over to you, Bill.
Thanks Jude.
As Jude mentioned earlier, we are pleased to report that the second quarter March, the 12th consecutive quarter of profitability.
Our truly Diversified revenue streams focused on traditional scheduled passenger service Charter passenger service and our growing freighter service delivered. The highest second quarter Revenue in some country history and generated. A gap pre-tax margin of 3.2% and an adjusted pre-tax margin of 3.9%.
Furthermore, this is our third consecutive quarter of both total revenue growth year and and year-over-year Improvement in pre-tax margin.
During the second quarter, our cargo Block hours were lower than we had anticipated at the beginning of the quarter, due to the timing of cargo aircraft deliveries.
That being said, we were able to Pivot. Our pilot resources toward passenger flying and more than offset. The reduction in cargo Revenue with increased. Charter Revenue, demonstrating the powerful benefit of our uniquely Diversified business model.
As of today, we have received delivery of all 8 of our incremental cargo aircraft and is Jude mentioned. We remain on track to have them all in service, by the end of the third quarter.
Second quarter, total revenue of 26 263.6. Million was 3.6% higher than Q2 of 2024 on a 0.5% decrease in total Block hours.
Revenue for our passenger segment which includes both our scheduled service. And our Charter businesses was down 0.8% year-over-year, primarily on a greatly reduced, scheduled service operation,
Due to our focus on growing our cargo segment this year scheduled service asm's declined 6.2% in Q2 versus the same period last year.
Scheduled service tra increased 3.7% as total fare, increase 6.5%, which offset the 1.3 percentage Point decline in load Factor.
Throughout this year, we have seen scheduled service Revenue book closer in and are not anticipating that to change anytime soon.
As Jude describes Q2, demand was strong, with May exceeding expectations.
Third quarter, scheduled service asms are expected to contract between 9 and 10%. As we continue to pull back in support of the growth of our cargo business.
Second quarter, Charter Revenue, grew 6.4% to 54.3 million on a 7.9% increase in Charter Block hours.
As a reminder, some of our contracts have Revenue reconciliation based on fuel prices.
Since fuel prices were down, 15% in the quarter versus the same period in 2024. We naturally received less fuel reconciliation proceeds than we did a year ago on a per block. Our basis
Excluding this fuel revenue, reconciliation revenue received from charter flying easily exceeded the 7.9% increase in block hours in the quarter.
About 77% of our Q2 block. Charter, Block hours were flown under long-term contracts, which is a similar level as Q2 of last year.
Revenue in our cargo segment grew 36.8% in Q2 to $34.8 million. This was the highest quarterly cargo revenue in our history.
Cargo Block hours grew 9.5% as we had 15 cargo aircraft in service by the end of the quarter up from 12 in the previous year.
We expect to have all 20 flying by the end of the third quarter as our cargo aircraft induction process is now pacing as planned.
Turning now to costs, Q2 total operating expense grew 2.2% on a slight decline in block hours.
Adjusted tasm increased 11.3% and was heavily impacted by the 6.2%. Decline in scheduled service asms, a rising from our ship out of the passenger business into cargo business.
We project this year-over-year quarterly increase in Chasm to be the highest such increase in 2025.
It is important to note that our adjusted Chasm will remain elevated, as we do not anticipate the resumption of growth in our scheduled passenger service until the back half of 2026. Following the annualization of our cargo group,
South salaries grew in Q2 12.9 in large part driven by a 7% headcount increase.
The increase in Pilot contractual rates from the beginning of the year and our new flight attendant contract that was ratified in the first quarter.
Also, during the second quarter, landing fees and airport rent expense increased 9.1% due to higher rates. The 14% increase in other operating expenses was primarily the result of an uptick in operations.
And a decrease in activity from our engine part sales programs.
Regarding our balance sheet, our total liquidity at the end of Q2 is $206.6 million.
Given our focus on Amazon growth in 2025 and into 2026, coupled with the aircraft currently on lease to third-party airlines, we do not anticipate a need to purchase any incremental aircraft until we begin looking for capacity growth for 2027 and beyond.
During this quarter, we took redelivery of our second Boeing 737-900, which was previously on lease to another airline.
And we expect both of those aircraft to enter service later this year.
We also extended the leases on 2 of the remaining 5 aircraft that are on lease to other airlines.
And we now expect 2 of those 5 to be redelivered to us in Q4 of this year and 1 in each of Q2, Q3 and Q4 of 2026.
We still expect 2025 capex to be between 70 and 800 million with 21 million already spent in the first half of the year.
Our total debt and lease obligations were $562 million at the end of Q2, down from $619 million at the beginning of the year.
We expect to pay down an additional $44 million in debt by the end of the year, and we still have available all of our $25 million share repurchase authorization from the Board of Directors.
Turning to guidance, we expect the third quarter, total revenue to be between 250 and 260 million on an increase in Block hours of 5 to 8%.
I would like to point out that included in our Q3 Revenue. Guide is a reduction of approximately 33% in other Revenue versus our Q2 results driven by a reduction of the number of aircraft we have on lease to unaffiliated Airlines.
Plus a $2.7 million Q2 benefit of a lease redelivery, as described in our 10-Q.
We are anticipating our Q3 fuel cost per gallon to be $2.61 and for us to achieve an operating margin between 3 and 6%.
Operator: I will open up for Q&A. Please provide your questions.
Certainly, as a reminder to ask a question. Please press star 1, 1 on your telephone, and wait, for your name to be announced.
To withdraw your question. Please press star 1 1 again.
And our first question comes from the line of Ravi Shanker with Morgan Stanley.
Stanley sir.
Great, thanks. Uh morning everyone. Uh so Jude uh, thanks for that, uh, trajectory on the kind of long-term normalized DPS. Can you just talk about?
How purely idiosyncratic versus industry, macro dependent that passed to 250 EPSs and maybe kind of what you're assuming for industry conditions at the time and 2227.
Very nice. Thanks Robbie. Well, we look at long term Revenue forecasts, we use a general Tailwind associate.
Of about 3%.
I have a 2-factor model associated with changes in utilization of our fleet and also absolute growth.
And we're not assuming any changes in utilization.
Versus last year, as we look forward to those forecasts, it really is kind of just.
Normalize I would say um, unit Revenue performance.
Current fuel prices.
um, you know the the cost that we can reliably predict which today are most of our cost is most of our uh labor situation has been sorted out, most Co
So, you know, I think we're we're pretty there's not a whole lot. I think of aggressive or conservative assumptions. It's kind of right down the middle.
Understood that's helpful. And maybe as a follow-up, uh, apologies, if I missed this, but I know you're um, uh, your Amazon revenues are not volume dependent, but do you have any sense from them as to what peak season is shaping up? Like, because that's still somewhat debated uh in the space?
Yeah, I'll make a couple comments and bill has done a lot of work on this. I I mean the basics are that the the utilization of the assets
And the availability assets are both delayed. So we're taking airplanes. We're, we're doing work to them to get them ready for service. Um, they're entering service later than we expected. And by virtue of that happening, the fleet is
committed.
Because we want to make sure that we're executing well, it's just taking a little bit longer to get to ask, you know?
Kind of terminal velocity on that fleet.
Very good. Thanks guys.
Thank you. And our next question comes from the line of Brandon Oglinsky with Barclays.
Hey, good morning. Thanks for taking the question Jude. Maybe I can follow up there. Um, can you remind us? Do you have like, a, a step up in pricing on that contract as well? Later this year? Or is that an issue looking in the next year?
Yeah, we so we have a, uh, annual this is Bill, by the way, uh, this is we have an annual step up on the contract, every, um, basically on the anniversary of the contract, that sort of standard with it. And with the, with the new Fleet coming in, we actually recently, um, actually, when we put the last aircraft in, in place, we have a, a final step up of the of the uh, change in the economics on the on the updated.
Uh, agreement.
So current rates will be adjusted by annual escalators from here forward.
And current rates are much higher than they were this time last year, based on the, the contract that we signed with Amazon.
The end of last year.
Okay, but we're at that now.
Run right now. Yeah, Bill said it just it just kicked in just kicked in. So Q3 will be the
Okay got it. And then Jude maybe just a a bigger question about industry capacity and maybe, you know, strategic actions that can be taken here just giving some of the challenges that your competitors larger will cost.
Yeah. Um,
you know, we're just our strategy here is to just continue to execute and and produce good results and
Keep an eye out for organic growth opportunities, that present themselves through restructuring or disruptions.
Around the industry. I, I certainly agree with your assessment that there are some challenge to Airline operators out there. Um,
You know, I don't know what to say. I mean, our our approach is basically, let's get a good balance sheet. Let's continue to execute. Um,
reason that a lot of these carriers are struggling is because I overcapacity situations, which means we can't really move into these markets um, in advance of them having a pullback
So, I think we're taking the right approach. It's...
Just continue to execute build up our Amazon base, that allows us to be.
You know, we're really nimble with our scheduled service capacity.
Continue to strengthen the balance sheet, maybe uh distribute, some of our Surplus Capital to shareholders.
And be ready to move when there's a when there's an opportunity.
Okay, appreciate it. Thank you.
Thank you.
Our next question comes from the line of Dwayne pfennigwerth with evercore isi.
Hey, good morning, thanks. Um, do you appreciate you? Uh
speaking to the longer term earnings power, but I wanted to ask you just to maybe in the more intermediate term, it, it feels like
You know, we've been in kind of a known holding pattern where you're holding resources.
In expectation for this cargo ramp, it sounds like, although there's been some shift, the idea that you're going to be kind of fully ramped by the fourth quarter is still on the table.
So maybe you could just help us understand um kind of the intermediate term margin Improvement um when you kind of hit your stride in cargo which feels like the fourth quarter and feel that feel, feel free to, you know, push back on that if you don't feel like fourth quarter would be a good measurement point.
Hey Dwayne yeah I think fourth quarter for cargo ramp is pretty good. Um we're on track for that and and really what we're experiencing right now.
Is.
We're going to grow credit hours, so pilot availability hours.
By 10% year on year.
That's a nice, stable output for.
Predictable.
We're not having to add extra infrastructure.
Um, that puts you know, cargo is pilot intensive. So we get less Block hours for every credit hour than we do in scheduled service. And so, you know, we're going to grow a block hours by a little bit less than that. And when we plan the third quarter, we were planning on.
The cargo business being even bigger than it turned out to be for the reasons I mentioned earlier.
As a result, our scheduled service is incrementally smaller. Now we don't get any offset cost savings on the fixed.
Uh, basis, you know, so we have a bigger fleet and something else that's happening is that we have lease returns that are going through induction.
Every airline, when they take an airplane, typically begins expensing the ownership of that aircraft when the airplane goes into service. Differently for us, we're taking a lease redelivery, putting it through our induction process, and continuing to depreciate the asset while it's being adopted.
So we have unproductive assets on the passenger side, we have, you know, no change in the overhead of the passenger Fleet that we had had had in service before we started our cargo ramp and that's just putting a lot of cost pressure on the business on a unit cost basis as we absorb this cargo growth but 10% growth this year, 10% growth. Next year that puts us into a growth mode again on our scheduled service Fleet, you know, scheduled service operations
You know, probably around the second quarter of next year and discontinuing on to absorb the fleet that we already own coming into our operating fleet thereafter.
So there's a little bit of noise. I mean, we're going to still lead the industry in margins. Um, but the growth rate is going to be a little bit constrained as we absorb this cargo expansion.
Okay, appreciate those thoughts. And then, just on your I, I understand this can move around a little bit, but on your initial view of 5 to 8% block our growth for the third quarter, specifically, I wonder if you could just comment on how that looks by segment.
Um, yes, you got that. Yeah, I have that. So
um, for the third quarter, obviously, you know, there's going to be tremendous amount of block our growth in our cargo Summit segment, probably year over year up.
Between 40 and 50%.
Scheduled service will be down high single digits.
Charter service will be kind of
Up single digits, 1 thing, that's really important. Is I try to cover with my prepared comments is that capacity cuts and scent service in July
Are.
You know, the prophet.
Those hours, and we don't get much change to our unit revenues by cutting.
The profitable flights by necessity.
Differently, September, we're cutting marginal marginal flights. That would have been in the schedule. So there's almost, you know, there's very little effect
in uh, in months like September and and uh, early May and off peak periods like that.
So, it really, you know, we're kind of at a...
The the most acute situation right now with this um, imbalance across our segments in July and August as we're cutting really productive flying.
Thank you.
Yep.
Thank you.
And our next question comes from the line of Michael linenberg with Deutsche Bank.
Yeah. Hey um, good morning everyone. Hey just um sort of back to the Wayne's question and maybe trying to get in a little bit more granularly. When we think about just the margin drag in the September quarter, you know, Jude you've, you've talked through all the puts and takes, um, about the ramp up and the fact that, you know, you're underutilizing across your scheduled service, how should we think about it, on a margin basis? I mean, are we looking like a drag of, you know, 3/400 basis points here any, any any color on? That would be great.
I think for the third quarter, you could see $10 million bucks.
4%.
Super, super helpful. Um, and then um, my second question, you know, as you know we've heard from other carriers, you know, the consumer may be changing and how they book. You know, we've heard carriers talk about shorter booking curves, we obviously you know, the most price. Sensitive customer seems to be the most impacted right now in the current macro environment. Is there anything that you can talk about? Um, and maybe what you're seeing and I realize you're coming into this with a very constrained capacity backdrop, which may make it more difficult for you to discern some of the um, some of the maybe structure structural or secular changes that we're seeing and how people book Etc,
Thanks. Yeah, I've listened to the second quarter earning calls that have come out this far and we're not really seeing
Similar situation. I mean, our bookings are strong. We're seeing year-on-year, monthly improvements in unit revenue. Um, our peak periods remain.
Really good. Um, we're concentrated on the Peaks. So that's kind of drives the business. If you go back to preco margin comparisons for peak days where
Replicating, those situations inspired.
Higher fuel prices higher airport cost higher labor cost higher maintenance costs associated with OEM pricing. You know it's it's all passed through and and it it's just incredibly similar.
um,
And you know, the other thing that we're seeing is kind of like everybody's saying domestic's weak, and we're going to see.
A pressure on the third quarter. And then, and and some cases airlines are, um, kind of banking on a fourth quarter recovery.
When you go back and look at our expectation of the third quarter, when we plan the year, our budget is almost spot on our performance that we now expect to experience in the third quarter. So like
Things are pretty good and I think it mostly reflects 1 is we're concentrated on a healthy local economy here in Minnesota. Secondly, um, the
The capacity, overall, all for the industry across our network is either slow growth or modestly. Declining
Um, and then, you know, we're kind of also into a point where we've absorbed most of the inflationary pressures. So we can be pretty good about where we think costs are going to fall as we add capacity into the network. So.
You know, things are pretty good and we have a lot of Tailwind looking forward into the back of the year, with the launch of our loyalty program, we're getting PBS out to our crews which I think is going to increase productivity. Um we've absorbed the last contractual you know uh rate increase on our Pilots
Really high yield so. Um, but you know, if you if you stabilize for that
July looks really good. I mean, we're booking the winter right now. We're scheduled out to April.
Bookings. Look really strong into the winter Peak period for us.
I mean, August is closing in a lot better than we had thought just a couple of weeks ago.
Um, so I'm kind of, you know, somewhat experiencing what it's got Kirby talked about on his call with the, with the recent
um,
Strengthening of close-in bookings—we're certainly seeing that here.
But I mean, we're not kind of, we're not experiencing the variance to what we expected.
That other airlines are talking about that I can't.
I I can't dude how much of December quarters booked right now? Like if you do you have a sense of just
15.
Okay, okay. Okay, that that makes sense looking at the actual numbers right here. Hang on, 1 SEC, Mike.
What do you got?
Sort of. Yeah, mid team. That's exactly right. Yeah.
Perfect.
Now, thanks for that. That's all very helpful.
Really appreciate it.
Thanks Mike.
Thank you in. Our next question comes from the line of Tom Fitzgerald with TD Cowen.
Hi everyone, thanks so much for the time. Um you just wanted to uh return back to Capital allocation and um
You know, it just seems like you guys have such a, such a lower risk opportunity here versus a normal Airline. Um, and with the stock trading around like 4 times, um, you know, the 2027 potential or mid year 27. How do you weigh like next year? How do you kind of weigh that balance between growth opportunities? And then, um, shareholder returns, like, will the PE be kind of the the deciding metric? Or what, what else? Kind of goes into the calculus.
We run the business for EPs, and it's certainly a viable strategy then to reduce share.
I think that, for me, the balance is and the absence of the building is a, we got liquidity. We're producing a lot of free cash flow. So to start with that. Um, we're not going to do any debt prepayments beyond our amortization schedule unless it's associated with a refinance.
So, you know, we're going to continue to build cache, and I think the balance is...
Returned to shareholders, do we try to find assets?
We're working real hard on trying to find some or I'm talking asset deals up for aircraft. Or are we going to have a bunch of dry powder for what we think is going to be a shake up in the low cost space in the near term?
Um, and I think probably we'll end up doing a little bit of all 3.
So they have in that. Yeah I I would just add. I mean just 1 thing that we are cognizant of is is a fairly severe inflationary pressure on on you know aircraft assets and specifically engine assets that are that it's important to us that so that while
We do have, you know, relatively modest capex. Um Outlook, you know depending on what, you know what, the severity is of that inflation. You know, it could sort of have some upper pressure, which puts, you know, availability pressure on the ability to do shift for the share BuyBacks.
but certainly at uh, at today's pricing, it's
more attractive that it was yesterday. So we want to be opportunistic in the asset Market. If there's a big portfolio that comes along for airplanes that we intend to operate or engines, we intend to use. We're, we want to be able to act without without any Capital constraints.
So that's consideration as well.
Okay, that's that's, that's really helpful. Just to kind of get some of the philosophy there. Um, and then most men have already been answered, but just thinking about um, you know, if things go better than expected in 2026 like what some of those um meaning like scheduled service. Do you do? You foresee just giving how Nimble your model could be like in like June and July with the World Cup is that like something where, um, you know, in the past like you've gone into markets like Texas or Hawaiian when they've been hot like do you see that as like maybe an upside opportunity or things in in in the track chart or things again for the time guys?
Sure. Tom know, the World Cup will probably be a little, a slightly negative event for us because uh,
uh we we'll be able to schedule around some of the events and pick up some high yielding traffic. But the offset will be uh the Major League Soccer will be paused during that period. I think it'll be probably a little bit slightly negative as a result of the World Cup.
Thank you.
Our next question comes from the line of Scott group with Wolfe research.
Good morning. Um, so that couple questions ago, that 10 million drag you're talking about for Q3 how should we think about what that looks like in Q4?
Is it using its fully gone? By the time we get to Q2 2026,
Yeah, so it goes Q4 goes uh, Thanksgiving and Christmas Christmas Peak periods. There's about an aggregate 30 days where things are really good. And so if we can recover, um,
Really, it's about pilot capacity. By then, if there won't be any impact, that's unlikely. I think it'll, you know, this is kind of peak impact and it'll kind of...
Ameliorate over the fourth and first quarters of the subsequent year. The next big opportunity for us is in March of 26 and I I feel better about getting back to uh, back to un unconstrained situation on the scheduled service Fleet by then.
Yep.
And then that longer-term comment about $250. Um, second quarter, $27. It's just like a very specific sort of quarter. So what? And it's like especially because Q1 is usually your peak quarter. Like why is it Q2? Is there something about the...
Shape of earnings for you that changes now with some of these mixed changes, I'm just was surprised, it was such a specific quarter.
Got, it's a pretty simple analysis, it's just our 10% growth.
Um, rolling that out when that gets to a fleet of 70 at the utilization that we expect it to be over the long run.
So, it's just algebra.
Okay, okay. And then maybe just lastly just to follow up on that like is
Is there a step function that happens there? Or do you do you think we see sort of linear Improvement, like in 26 on our way to that sort of longer term? We're not assuming
Right, we're not assuming any step function, we're assuming a linear approach, but there there's a lot of uncertainty there, particularly around changes and we're launching a crew base this year, which is the first, um, non- Minneapolis pilot base this company's ever had, uh, we don't know what the effect of that's going to be, but I think it's going to be positive. We're going to launch a PBS. As I said earlier, which is a different way to roster our crews. There's a lot of efficiency in that, um, and so those in those initiatives together, may change the trajectory substantially.
Um, and we can bring utilization online faster.
So, I think we're, we're, you know,
Summarize all that by saying we're pretty conservative on where we think growth is going to go. Um, I think there's probably particularly with hiring a Pilots being where it is. There's it there's no constraints there, um,
Particularly with that, I think that we're probably on the conservative side.
Okay, great. And about one last one,
Sorry. Go ahead. If I could just speak to 1 last 1, then any just any caller on competitive capacity. Um, you're seeing and as you look out over the next quarter or 2,
Yeah, if you kind of look month by month, if you go all the way out. Now, a lot of airlines have an extended, their schedules past January, which is a head scratcher in Adobe itself. But if you look out across our Network, all the way through our selling schedule, um, in the beginning of April, it's it's either flat or down, it looks really, really good. Um, and I can't imagine we don't have
You know, with the kind of demand, maintaining its current level capacity, very modern, you know, down single digits across our network. Um, I think we're going to continue to see the kind of unit revenue trends we already produced in the second quarter.
Um, importantly, uh, Southwest pulled back from the Minneapolis Market Sprint, Frontier. Pulled back from the Minneapolis Market Allegiant. Doesn't have many outlets, and there's current selling schedule. I mean, we're just seeing this become very quickly, a 2 Airline market and, um, and I think both carriers are going to be really healthy in that environment.
Okay, that's great caller. Thank you, appreciate it.
Thanks Scott. Take care.
Thank you. And our next question comes from the line of James Kirby with JP Morgan.
Hey, good morning. Uh, maybe just a little more color on the, on the charter. And how, how to model that business out into early 2026? Um, you know, given scheduled service sounds of the capacity is going to be flat to down in the first half of the year is that consistent with where Charter capacity should be. Um and maybe just a comment on that on that hawk flying looks like last quarter. I was
Rate. Um, and so any comments there, as we think about back half of this year and early next
Yeah let me give you some general comments about how we think about Charters and then uh and then bill can give you kind of what we can guide to. I think um,
So so Charters it comes in 2 flavors. 1 is long-term commitments, which operate economically, very similar to our cargo business, very stable, very reliable, margins pass through economics associated with uh, ground handling fuel, Etc. Um, those will not change. I don't think there's going to be a lot of growth in those opportunities for us. It's Casino charger. Uh, Charters Major League Soccer and uh our VIP business which operates out of LA
Um, the other side of that is ad hoc bids which tend to happen closer in in the fall for us, that's, uh, Collegiate football. Um, all year round is military. Um, those have been up for us recently, you know, in the second quarter because of availability of crew and airplanes as we didn't have the kind of growth that we had expected from our uh cargo Fleet as we talked about earlier.
Looking forward, I think that's probably going to continue to be the case through the back half of the year. Um, where we'll be able to be more aggressive at picking up these ad hoc opportunities, but I think it's going to be a relatively minor impact on overall results.
Billy. Yeah, I mean, we spoke about sort of the growth of Charter earlier. I mean, from a
On a unit Revenue perspective. I mean our Charter, our Charter, as a whole sort of on a per block, our basis is growing on the annual basis of approximately 4%. There's some, you know, Peaks and valleys through the through the quarters. But that's probably a good good run rate.
Okay, got it, that's helpful. I appreciate the caller. Um, and then second question of the, the 1.5 billion Top Line, uh, by the second quarter of 2027, are you able to break that down maybe by mix of segment? I, I mean, or, or if you're not able to, I mean, you talked about long term Target, uh, weights is, is that just consistent with where you're seeing it?
Yeah, $230 million to $240 million of that is going to be in cargo. Bill talked about charter growth, you know, 4% from where it is today. The remainder will be in scheduled service.
Great. Thanks. Jude.
Yep.
Thank you.
In our next question, we hear from Katherine O'Brien with Goldman Sachs.
Hey, good morning, everyone.
Good morning. Thanks for the time. Um so you guys extended 2 leases uh that you have with the third party Airlines pushing out the returns into 2026 is is that a reflection of your own Staffing or demand doesn't sound like it or or just the economics were too good to pass up. I'm just trying to get a sense of how you're thinking about, um, when you can start pushing the utilization on that on that passenger Fleet more and and miss the gating Factor still Pilots.
Yeah, so that's a scenario where we are faced with all the issues that we talked about where we're growing, but not able to absorb the fleet growth that we're experiencing. And then also the operator really wanting to keep the airplanes.
So we're getting great economics, by leasing them out, until we're ready to operate them. It's kind of an intersection of the 2 points that you brought up.
Okay, great. Um, and then I know you talked about July, um, having tough comps, the rest of the month, Verizon will be positive. You can get some more details on how things are looking to the fall. Like, you know, how, how does August compared to, uh, June, um, any early thoughts of September or any geographies we do want to call out as particularly strong or or maybe less strong. Yeah sure. I'm happy to give you more color. We're we're
The most significant Trend, I think in our bookings is that we're consistently coming in under, where we expected on low factor and higher, where we expected on fairs. And then ancillary unit Revenue has
Continued its steady climb of low single-digit improvement. Now, the fair low factor trade-off is a result of demand close in. As we adjust our pricing in expectation of that demand, we're accepting lower load factors to hold seats available for the expectation of closer-in demand.
Um,
you know, across the network generally we're seeing
Um, we can, uh, look at weaker in, um, California, Southern California desert destinations.
And I think most of that is attributable to OA capacity.
Um, so, you know, I feel these are sort of normal variations across geographies that we experience every time we look at revenue. So.
I think everything's in a pretty tight band of of, of expectations, and
Nothing really stands out as weird to me at this point.
So I feel really good about where we're predicting things to go based on the fact that we're hitting where we predicted to be now. Uh yeah no that makes a lot of sense. See if I can squeeze this 1 really quick 1 and um you mentioned participating in a potential, shakeup in the ulc space. Um as of now I know hard to predict and so there's not like a it's not an opportunity the exact moment but are you? Are you speaking more like acquiring assets could that include outright m&a. I know you've talked about that in the past like you'd need to see a cost structure and a pilot. Um, and a and a pilot contract that would align better with yours like as it stands. Now are any of those things aligned where you could be talking more out at m&a or or right now, it's looking more like acid equity.
Positions if there was something attractive. Yeah, so kind of all of the above but I say we, I don't spend any mental horsepower on things have limited amount of that to give and and I, I tend to focus on things I can control. So for us that's asset Acquisitions. And then being ready for organic growth opportunities based on a shake up in the industry m&a, because of our size is probably going to be something that we
Are asked to participate in not.
uh, not initiating and you know, so therefore we don't I don't spend any time worrying about it and and I think it's an unlikely scenario because of the the because of how different our model is
um,
you know, we we're just best serving our shareholders by keeping our heads down, executing a plan and and continued to outperform the industry.
I think it sounds like a fruit plan. Thanks so much for the time.
Thank you.
And our next question comes from the line of Christopher Steph lopolis with SI
Morning, everyone. Thanks for the questions. Uh, going back to the targets.
On 27. So just want to understand, uh, I guess the inputs here. So I heard a 2-factor model, wasn't clear, exactly. What's in that but 3% inflation, uh, 240, I think you said, uh, in cargo out of the 1 and a half on the top line, so, and utilization similar to last year, uh, if that's the case. So maybe if you could give on the utilization piece,
Um, exactly. What's contemplated on the scheduled and cargo side? And then, is there anything you need with respect to Charter? Um, you did call out casinos, Major League Soccer, military, and college football, um, that would be different perhaps versus where those contracts currently sit. Thanks.
Yeah, there's a lot there. So first to kind of review the, the the inputs, so that that the 3% is just an inflationary. I mean we just add inflation to kind of the backdrop of of where we do long-term forecasts, the 2-factor model is just
What we experienced on unit revenue impact from a change in utilization, which we're assuming is zero because we're.
Replicating our inflation. I mean our utilization as we look forward, and then absolute growth. So, absolute growth.
Puts pressure on unit revenues but that tends to come down as as uh incremental capacity as same store sales or new markets. Um, the impact of that kind of stabilizes over time. So that's how we think about forecasting, long-term Revenue. Um our last year's Fleet utilization was uh 7.3 hours per day per passenger airplane and so we're assuming we get back to that um, somewhere around middle of 2027.
And kind of, that’s the inputs on the long-range plan that we have.
On the charter growth.
Um,
You know, the track programs, as I mentioned, I don't see right now a whole lot of opportunity to grow that business.
But ad hoc is really a function of having fleeting and crew available when there's availability. So as the passenger fleet grows, we'd like to keep our flying kind of.
Ally the same; which is to say, we have off-peak opportunities where we have surplus fleet and crews, and we can take advantage of any opportunity that presents itself. So that's kind of the basis of our long-range assumptions.
Anything to add. No, I mean, you know, just keep in mind that, you know, this year versus last year, that, that utilization will continue to decline faster in the back, half of the year because of the, because of the, uh, cargo sort of ramping up. Um, so that's why it's going to take us a while. So you might might not see much utilization variance in the first half of the year is due to describe and that. Um, but
That'll sort of kick in and sort of bottom out, probably in Q1 of next year, on a year-over-year basis.
Okay, the second question on the um, what I heard is some, the lay around the utilization with the Amazon aircraft. So is that just some delays with deliveries prepping or perhaps some hesitation around the schedules, giving all the noise around tariffs and demand. And that, if we, if there is a weak peak season, um, any uh, are those aircraft able to be deployed in other areas? Just want to understand. Again, if you could, you know, reiterate weak Peak, what that might mean for utilization, volume commitments Etc. Thanks
It's a CMI model. We operate the schedule they give us, and as the airplanes are coming in, they were delayed.
By lowering the utilization and also the assumed entry into service dates of the, the rest of the fleet we had already built our scheduled Services plans. Um, that included these higher production levels for the cargo Fleet and therefore, we were just under allocated, um, you know, that'll correct itself in very short order and
You know, I can't read anything into.
What the schedule that they produced was a result of, I just don't know.
Other than those internal issues around, uh, getting the planes in service.
Okay, on the week, peak season piece. If that does occur, I realize it's still early.
I'm sorry. I didn't say it again. Please for for peak season. Uh shipping uh, still early. But if if if the season does come in sooner than expected, um are you able to do anything else around those? Those those assets and just maybe if you could remind us around the, the bottom commitments and and how that all works? Thanks.
Yeah, sure. Looking backwards, generally the schedule, which is what we love about it, is very flat and reliable.
Um, so my assumption would be going forward that we would expect the same. Um, and these are Amazon airplanes flown for Amazon's purposes, and I don't expect anything different out of this fleet.
Okay, thank you.
Thank you. I show no further questions. With that, I'll hand the call back over to CEO Jude Bricker for any closing remarks.
Hey, guys. Thank you for your time today. We're really excited about where we ended, and we look forward to talking to you again in 90 days. Take care, everybody.
Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.