Good morning, everyone. Welcome to day three of the Bank of America Annual Transportation, Airlines, and Industrials Conference. Kicking off this morning, we have the team from Sun Country here, and thankful to have their Chief Financial Officer, Dave Davis, with me. So Dave, welcome to the conference.
Thanks. It's great to be here. Appreciate it.
Yeah, sure thing. We heard from some airlines yesterday, obviously, just from the investor community, you know, the focus remains just on demand. You know, we heard from, you know, Alaska, Air Canada yesterday. Just premium still seems to be relatively strong. You know, yourself, you know, some of the other ultra-low-cost carriers reported over the last week, 10 days, a little bit softer coming into 2Q than maybe people would've thought. Can you maybe give us the status of what you're seeing from the demand environment right now?
Yeah, I mean, first of all, if you look at our numbers, I mean, we had a, we had a very strong first quarter. You know, we had an operating margin of, of 18%, which I think... I, I don't know where the next closest, you know, airline was, but probably 5% or 6%. So I mean, it's, it's a very outsized performance for us-
Yeah
... in the first quarter, so we continue to lead the industry. I would say from an overall demand perspective, here sort of is where things sit from our perspective. So at peak periods, which is where the airline specializes, demand continues to be very strong. There's strength on the fare side, so those are performing really well. The story of great peak period demand and weaker off-period demand, I think, is persisting.
Mm-hmm.
So we saw, sort of saw, let's say, late February, early March, a little bit of an inflection in off-peak fares. In other words, sort of a downward drift. That took our March numbers down a little bit lower than we had originally expected. Going into the second quarter, I think sort of that pricing pressure, it persists. So, the airplanes are full. We, you know, we're able to fill the aircraft. Fares are a little softer than we had expected initially going into the year, particularly at off-peak times. You know, the airline specializes, as I said, in focusing on peak periods, less capacity in off periods. In the second quarter, we probably have a bit too much capacity dedicated to off-peak periods. We'll correct that as we go into the back half of the year.
We're making schedule changes sort of as we speak. But I would say there's a, there's a lot of capacity in the market right now, in the domestic market anyway, and a little bit of fare pressure out there.
Got it. It's this peak versus off-peak dynamic. I don't like... Is it new, or is it just getting worse? Do you think it's just getting worse? 'Cause I feel like it's certainly been kind of part of the conversation for the past year or so, you know. Just curious, like, is it, are you just seeing that dynamic happen now? Is it, at this point in time, just getting worse? And just, like, why do you think there's too much capacity in 2Q? 'Cause I do feel like this has been a common theme.
I don't think this trend is necessarily new. I think we and others have been talking about it now for probably a couple of years-
Yeah
... since post-COVID. It definitely seems to be persisting, maybe even getting a little bit more exacerbated. But I think it, you know, it's hard to completely dissect how much of this is demand weakness and how much of it is just a lot of capacity. So in some of our markets in particular, some of the Caribbean markets, Florida, there's just been a lot of capacity added, and that's had an impact-
Yeah
... on fares.
When you think about your consumer, maybe the kind of income cohort that Sun Country, you know, focuses on, you know, how do you feel, you know, how do you view the health of that consumer? You know, maybe do you think there's just a lot more price elasticity from them than, say, maybe other areas of travel?
I mean, they're still taking vacations.
Mm-hmm.
So, you know, if you look at our first quarter results, you can see that people are still, you know, still traveling during holiday periods. But as I said, there's probably a bit of softness in some of these off-peak periods, so maybe it's these sort of discretionary trips that aren't happening as often as they were. You know, again, it's difficult to disentangle a lot of capacity in some of these off-peak periods from sort of the demand environment.
Okay.
I think sort of the revenge travel phenomenon is kind of over.
Yeah.
You know, we're at sort of a steady state at this point.
Yeah.
That's how we view it. Our unit revenues are now consistently about 20% higher than they were in 2019, and that seems to be kind of where they're-
Yeah
... where they're persisting and where they're settling out.
Settling out. Yep.
Yeah.
Okay.
Yeah.
When you talk about too much capacity in the market, obviously you're largely Minneapolis. Obviously, go up against Delta. Are they just... Like, what's the competitive dynamic like there? You've seemed to have lived in harmony for, you know, with them for quite some time. How is the competitive landscape kind of changing now, if at all?
Yeah, let me just step back for a minute because I sometimes, you know, we end up going down the scheduled service discussion in sort of-
Mm-hmm
... you know, sort of all the analyst meetings, everything we have. The airline has three distinct segments. We have a scheduled service business. We have a cargo segment. We have a charter segment. The cargo segment and the charter segment... don't compete with-
Right
with these other carriers. It's—they're different markets.
Yep.
Same aircraft types, different markets. So in the scheduled service business, that is heavily focused on Minneapolis, largely because that's where we have success. The brand is known, fares are strong, the local economy's very strong, so that's where we've been focused from our scheduled service business. There has been capacity that's come into Minneapolis over the last few quarters, you know, in excess of what it was before. I don't think... There's really not any perceived kind of, sort of assault on our markets. In other words, I don't think that there's a concerted effort to do sort of damage to Sun Country. There's just an overall increase in capacity, and some of the markets that we have been in, particularly, in some off-peak times, have typically had relatively high fares, even in off-peak periods.
That's sort of come in with more capacity add.
Mm-hmm.
Now, I would say that, I think, in just recent actions that we've seen in the last couple weeks, you know, it's, there's, there's rationalization going on. Fares have come up a bit, some capacity has come out.
Okay.
We will take some capacity out, and the environment will sort of, you know, rationalize itself. Part of the capacity adds in Q1 and Q2 are us. We grew ASMs 16% in Q1, we'll grow 20% in Q2.
Yep.
The airline is rapidly growing. That's gonna have a natural down pressure on fares. As we go forward, we'll rationalize the back half of the year from a passenger capacity perspective, and then decide as we move into 2025, where can we maximize profitability of the company? What segments should we be focused on? I think we're actively looking at that right now.
Got it. So when you think about maybe so you're growing a bunch in, in Minneapolis. What's the competitive growth like?
Competitors have grown, too.
Okay.
Overall capacity in the first quarter in Minneapolis is up about 10% or was up about 10% year-over-year. Sort of similar numbers in the second quarter.
Right.
A fair amount of capacity growth.
You're mid-teen, mid-teen-ish.
We're mid-teens-ish.
Yep.
Exactly.
Yep.
Exactly. So others have added capacity to the market.
So does that capacity, does that, you know, out of Minneapolis, does that go into, you know, markets that you fly, or are they going to maybe other leisure or sun market destinations that just provide the consumer in the, in the area another option to go?
There's been a lot, and I think this is a consistent theme, there's a lot of capacity going into Florida.
Yeah.
You know, which is a big first quarter market for us. The Caribbean, there's been a lot of capacity in there. A lot of capacity into Cancun as well. So that's where a lot has been added. You know, that said, capacity up 10%, we grew 16%, we still posted an 18% operating margin.
Yep.
The earnings power of the business is there and demonstrated.
How do you think about new market growth, right? If, you know, if Florida has too much capacity, you know, too much going into Cancun, can you... How easy is it for you to get into a new market? And I'm making stuff up-
Yeah
... Vegas or, you know, Southern California, or-
Yeah
... you know, just provide, you know, a different type, a different option for your consumer.
So there are opportunities to fly at peak periods in cities around the country. So there's a lot of opportunity out there for this model to focus on peak period flying, and we will continue to do that. The other side of the coin, though, is we'll shrink in off-period, in off-peak times. You know, this airline probably is gonna generate, let's say, 8%-12% annual growth from a block hour perspective. So then we have to make the decision, where is that 8%-12% capacity growth gonna go?
Mm-hmm.
Are we gonna do more charter flying? Are we gonna do more cargo flying? Are we gonna do more scheduled service flying? To the extent we pull scheduled service flying down in off-peak periods, that frees up pilot hours, it frees up aircraft. We'll do more flying in cargo and charter.
Okay.
It's not necessarily that we have to go seek additional scheduled service markets to deploy our aircraft. It's additional scheduled service markets, what does the charter market look like? What does the cargo business look like?
Got it. And, you know, I'm speaking more to Minneapolis, but when you say you wanna grow, you know, you can grow more in peak, less in off-peak. Do you have the physical infrastructure at the airport to add significantly more flying in the peak?
Yeah, that's a good question. So the airline operates out of a separate terminal from Delta and other larger carriers. So we operate in T2.
Yep.
There's only a few of us in there, us, Southwest, couple others. So we have eight gates there, ability to flex up to 10, 11 if we need to.
Okay.
There's enough physical infrastructure, but that, the reason that's a really important question is because not only is the airline serving peak periods of the, you know, particular months, but hours of the day. So we have a huge morning bank-
Mm-hmm
... a bunch of flights going out, let's say to Caribbean, Mexico, Florida, coming back same time, and then doing another turn. So we take a lot of gates at the beginning of the day, and MSP is a great airport to work with, and we have no constraints from physical infrastructure right now.
Okay. If you have kind of a couple two or three incremental gates, just curious, like, at every hour, how quickly do you turn those gates? Can you turn them-
We can turn them very quickly.
Okay.
Yeah, very quickly. I mean, if we need them, we can basically move into them.
Okay.
Yeah.
Got it. So you're making, you made an interesting point before, just in terms of the charter decisions around charter, right? So if I'm thinking about if you're pulling down maybe some off-peak flying within scheduled service, how easy is it to transition that aircraft to charter? And kind of what are the growth opportunities within the, within the charter business? How quickly can you kind of pivot to that, to that segment?
Yeah. There's plenty of opportunity for growth in the charter business, and let me sort of talk about this for a second. If you look at the size of our charter business, it's been relatively static now-
Yeah
... for a couple years. What's happened is, we have forgone a lot of the charter market, which is sort of ad hoc kind of flying, like military flying-
Okay
... to the Final Four, kind of last-minute, sports team flying. And we've-
Did you get-
We've taken-
Did you get UConn to the Final Four? I know they had issues.
I don't even remember.
I'll leave.
But we have moved that capacity to long-term contracts. So about 80-85% of our charter business now is long-term contracts. MLS, we have a big contract with Caesars, we have a couple other contracts.
Mm-hmm.
That consumes all that. All that ad hoc business didn't vaporize. It's out there. The reason we haven't pursued it is we have been pilot-constrained at the airline.
Okay.
The best use of the pilot resource has been grow the scheduled service business. That's what we've been doing, which is why... Let's say we grow block hours 10% this year, we grow ASMs 15% or 16%, 'cause the block hours are disproportionately allocated to scheduled service. We will move that capacity and that pilot resource back to the charter business-
Okay
... as opportunities arise or to the cargo business as opportunities arise.
Okay.
So there's still opportunity for growth there. We have sort of got out of a piece of the market which we can move back into.
Got it. You brought up a topic I wanted to touch on, just on pilots, right?
Yeah.
You know, I, from an industry perspective, this time last year was all about, you know, pilot constraints and not having enough and getting them through training and, you know, getting experience to upgrade into the captain seat, you know, really across the industry. Obviously, a lot of things have changed over the past year. You know, other airlines are, you know, stopping hiring for certain periods of time, and, you know, stopping new classes. I guess, what's the latest from Sun Country in terms of ability to recruit, train? What are the kind of the continued pain points from a pilot perspective?
I think from a pilot perspective, it's mostly very good news. So basically, in terms of new hires, we have had. There's not an issue. We've been sort of slowing classes because there's not an issue with hiring first officers, and attrition has been at or below our expectations.
Okay.
So that's hasn't been an issue. The governor for us continues to be captain upgrades. But we're probably growing right now at about what we think potential growth is. So we don't necessarily want to be growing much more rapidly than this, and our flight ops team has done a great job of utilizing the pilots that we have better. So we've done a lot of things to sort of reduce unproductive time, and we've been able to grow as fast as we want to grow, actually, with fewer pilots than we thought we would need. So there's been a lot of work done on sort of the optimization side of things.
Okay.
Pilots are not a constraint at this point on our growth.
Okay. So it seems like just across the cost structure, there's just the inflationary pressures have eased or become maybe more predictable than they were over the past couple of years. When we think about your cost structure going forward, where do you see the headwinds and tailwinds cost-wise?
So from a cost perspective, I think we're the only carrier or one of the small number of carriers. In the fourth quarter, we had a year-over-year CASM drop. In the first quarter, we had a year-over-year CASM drop.
Yeah.
The costs at Sun Country are well in control. We did a pilot agreement that went into effect at the beginning of 2022. There's still a lot of time left on that deal, so there's not cost headwinds there. I would say inflationary pressures have sort of eased across the rest of the company. So we're very happy with where we are from a cost perspective. And as I said, you know, decreasing CASM is sort of where we wanna be. As we roll forward, if we shrink the scheduled service business, you know, that's gonna have some upward pressure on CASM, just 'cause we have less capacity allocated to the passenger business.
Right.
But overall, the cost picture looks really good.
That's what I was, actually, I was gonna ask: as you maybe pivot away from, you know, if you move some flying from scheduled service to, say, charter or more of that ad hoc charter, what would that impact be from a... I know, not CASM-wise, but just margin perspective?
Yeah, yeah. So we wouldn't do it if it wasn't margin accretive.
Okay.
So, so think about it this way. You know, obviously, our unit revenues are a combination of peak period and off-peak period. Some of that off-peak period stuff is particularly bad... So if we shrink sort of the off-peak schedule-
Mm-hmm.
It's gonna put pressure on CASM. It's gonna be a big uplift on TRASM, on unit revenues.
Yep.
And that we won't make the trade-off unless it makes sense, and there's a lot of opportunity for it to make sense right now.
Interesting. Okay. Maybe, you know, transitioning a little bit, so maybe the industry backdrop. Near-term kind of capacity issues aside, in your markets, you know, I think the, from the investment community perspective, I think as we roll through 2024 into 2025, obviously you have the Boeing delivery issues. You have GTF engine overhauls. There are just a lot of capacity constraints that are painting a pretty good, you know, industry capacity backdrop relative to, to recent year, you know, recent history in this industry. What's your view there? Are you as constructive on that backdrop, and, like, what do you think could derail that?
I mean, I think generally we're constructive on the backdrop and everything, you know, all the discussion of constrained aircraft deliveries are, is real, and putting some limiter on capacity growth in the business. Now, I think what... So we're very active in the used aircraft market.
Yeah.
You know, we source all of our aircraft from the secondary market. I think what we're seeing a lot of is used aircraft pressure on used aircraft prices as airlines are extending leases that would otherwise have terminated and replaced with the new aircraft.
Mm-hmm.
So I think a lot of these capacity constraints are limiting growth, but aren't necessarily sort of shrinking air. You know, there's not shrinkage happening because people are extending leases, keeping the aircraft they have in this. That's sort of what we see, and it's put a lot of pressure on used aircraft prices. For Sun Country, we have purchased all the aircraft that we need just to support the passenger business, probably through 2026-
Okay.
Well into 2027. So we're in the market all the time looking for deals, but there's no pressure on us to acquire aircraft at this point.
Oh, and, okay, that was gonna be my next-
Yeah
... next question. If, given the pressure on used aircraft, does it, you know, not make sense anymore? But if you have enough to fund growth over the next few years.
We, in last year, in 2023, we purchased some aircraft that were on lease to other carriers.
Yep.
Those aircraft remain on lease, will come off of lease and move into our fleet, really in 2025.
Yeah. Okay.
So that's plenty of capacity going forward.
Yep. I know you don't source directly with Boeing, but you are an all-Boeing fleet. Do any of the issues, you know, outside of the impact on used aircraft prices, do the issues that they're going through right now impact you at all, whether it's from maintenance or, you know, any perspective?
A bit. I mean-
Okay
... the impact on us is it takes a lot longer than it should to induct aircraft. Because work that we need done, certifications that we need Boeing to make, are slower than they-
Okay
... than they should be. It's actually, for us, it's gotten better in the last, let's say, year to 18 months, but it's still a constraint.
Got it.
No doubt.
So if you have the aircraft to fund your growth through 2026, how should we think about, you know, Sun Country's capacity over the next few years?
So I think we're looking at that, you know, very closely right now, and I think a scenario that's out there that we're really looking at is potentially pivoting away a bit from the scheduled service business to see actually capacity come in a little bit in 2025, and more capacity focused on our other segments.
Right. Okay.
I think we see some very high margin opportunities in those other segments that we're interested in, very interested in pursuing. And I wanna be clear, even if the fare environment was as strong right now as it was in 2023, we would probably be moving in this direction, because the opportunities are that good for us in a couple of these other segments. And we're working on that as we speak. Hopefully, we have more to say in the future, but as we move into 2025, if we continue to proceed along the route that we're on, we will probably shrink the scheduled service business a bit and focus more on these other segments. The other segments should generate margins at least as high as our scheduled service business, but be contractual, longer term-
Okay
... and less cyclical.
Got it. So does that mean there's something new coming with, with Amazon? What are the, what are the opportunities cargo-wise?
Yeah, I mean, potentially, that could be an area for us. So with Amazon, they're our cargo customer. I think we have a great relationship. I think they're happy with us; we're happy with them. If there's an opportunity to grow with Amazon, we're gonna pursue it. Now, when we signed the Amazon agreement, December of 2019, okay? So just fortuitously-
Yeah
... just before COVID. It was very high-margin business. That margin has come in a bit, largely because our costs have gone up-
In the pilot.
... particularly on the pilot side. Yeah. So if we move forward and grow that business, not only does it need to be more aircraft, which it would be, it needs to be at different economics.
Yep.
We are working through all that to sort of return that business closer to where it was when we first signed it.
Okay. I think your cargo business has been running in and around, call it $100 million-
Yeah
a year or so.
Yeah.
Right? What, like, what needs to happen to see more step function changes, you know, north of that $100 million? Do you have the aircraft availability? Like, what, what, what needs to change?
Basically, we need to take more aircraft-
Yep
and sort of negotiate a bit different economics.
Okay.
So the aircraft availability is not a problem. If you remember, for us on the cargo side, there's no CapEx cost associated with the aircraft. It's a CMI deal.
Right.
We operate the aircraft. We don't pay ownership costs. We don't load, we don't unload the aircraft. It's a great business for us 'cause there's no CapEx required. So the aircraft are out there. They're flying around already. To the extent that we take more of those, it's a relatively easy transition.
Got it. Okay. Now maybe with the last 10 minutes or so that we have left, definitely want to focus on the balance sheet. Cash generation, I think it's becoming a lot more topical out there these days. You know, what's your view in terms of your debt levels or the way you philosophically think about where the industry could go from a, from a debt perspective? Do you feel like, given what the industry has gone through and kind of the cyclicality here, you know, how do you, how do you view leverage? And do you think, like, over time, leverage should be, you know, as low as possible, or do you... Like, where do you view optimal leverage?
First of all, let me, let me sort of focus on, on us. So we have a, a very strong balance sheet. We've been very conservative.
Mm
... from a balance sheet perspective. The airline's levered to, let's say, between 2 and 2.5 times right now, and that,
Yeah
... the EBITDA, that's heading south. We spent... Again, remember, we're a smaller airline. We spent a little less than $250 million on CapEx in 2023. That was mostly associated with the acquisition of aircraft.
Yep.
2024, 2025, that number will be well south of that, well south of half of that. So the CapEx requirements of the airline are really maintenance, some IT investments, some spare engine investments.
Yep.
So, we do not have a lot of calls on cash. The airline is solidly cash-flow generative. We had a share buyback program in place. We repurchased, boy, probably 10% of the flow to the airline already. We'll sort of keep looking at opportunities there as we go forward. So we have a conservative balance sheet. I think we're in a... exactly where we need to be. You know, from an industry perspective, probably not saying anything new, but it's a highly cyclical industry. It's a very volatile industry. Having high debt loads with volatile cash flows-
Yeah
... is not-
Yep
... is not optimal, and I think we've sort of seen that before. So, you know, we'll opt for conservativeness, and I think that's probably-
Yeah
... what others should be opting for as well, probably more than, even more than historically.
Yeah. No, I would think so. Now with that, you know, CapEx step-down and the cash generation within the business, you said you have a buyback in place now, no dividend. Why the buyback over dividend, and, you know, could a dividend potentially come into the equation?
A dividend could potentially come into the equation down the road. I think we just like the flexibility of a buyback-
Okay
... program. You know, we can allocate a certain amount of money to it, be in the market when we need to be in the market, not be when we don't need to be, and we don't need to turn it off, turn it on. So we like the flexibility of buybacks. Maybe dividends someday, but not-
Okay
... at this point.
Okay.
Yeah.
You know, as maybe you pivot away from, you know, a little less scheduled service into charter and/or cargo, does that change the way you think about the liquidity needed in the business? Like, does... And maybe we're not talking about-
Yeah
... like, massive changes, but, you know, what's the, what's the right amount of liquidity, you know, for the kind of business mix that you're m- wanting to move towards?
Yeah, the airline can even today can run at lower levels of liquidity than than I think other carriers. So, you know, we have... There's plenty of liquidity in the company. That could come down if we wanted it to, given a much more steady state, contractually locked-in cash flow stream. So for our cargo business, there's zero fuel risk.
Yep.
The customer pays for the fuel. On the charter business, there's close to zero fuel risk because we negotiate deals based on a reference price, and if that reference price goes up, we get reimbursed more. So for a big chunk of the revenue of the company, there isn't any fuel risk. There's also very little revenue risk because these are sort of locked in deals.
Yep.
So with much more steady cash flows, we don't need to be able to weather the, you know, very high cyclic ups and downs that we would if we were just a pure passenger airline. So, you know, we are running right now probably 15% of trailing 12-month revenue from a liquidity perspective. That's... We could be south of that if we needed to be-
Okay
... but that's, that's fine.
Got it. Maybe with the five minutes or so we have remaining, remaining, Dave, love to get your sense of kind of when you're at conferences like this, when you're meeting with investors, you know, like, what do you think they miss about the Sun Country story? Or what, kind of what are the points that you really like to get across from an investment perspective?
That's a good question. So, you know, I think the business is a little more complicated. And maybe it comes down to this: it's a little more complicated than other airlines and harder to model.
Mm-hmm.
You know what I mean? Because we've got, we've got a scheduled service business, but then we've got this charter segment and this cargo segment that don't generate any ASM, so it's sort of a different kind of a, kind of a beast. So I think there's some complexity there, which we probably need to get better at explaining. You know, the airline lost the least of any U.S. carrier in 2020. We were the most profitable carrier in the U.S. in 2021, very close to the most profitable carrier in 2022, which we had just signed a pilot deal, so we were, like, number two or three. The most profitable airline in the country in 2023, the most profitable airline in the country in the first quarter of 2024.
You know, we, we try to repeat that, but look at the earnings power of the business and the earnings potential of the business, and the stock price should follow that.
Right.
I just think it's difficult to fit us into a mold, so it's... You know, and we're small, so, you know, we're a smaller cap company-
Right
... which makes it harder to get people to focus on.
Do you think the geographic concentration plays into that, and the fact that you are, you know, always competing against kind of the behemoth in the industry? Do you think, you know, you need to diversify away from Minneapolis, you know, over time?
Yeah, so I think that's probably part of people's concern. But again, it's sort of the scheduled service focus. Like, a portion of our business, a portion of its network competes directly in Minneapolis-
Yeah
... right? Now, it's the majority of our scheduled service network, but it's not a majority of our company. We have a cargo business and a charter business that have nothing to do with Minneapolis. So the answer is, we want to diversify the airline, and we'll continue to diversify away from just Minneapolis focus, but that isn't just because we're moving the scheduled service business around. It's moving the business into other segments that we're already in and growing those.
Yeah.
We will pursue non-Minneapolis opportunities, which are definitely out there, to the extent that we think that maximizes the profitability of the business.
Okay.
Yeah.
I know you give a lot of disclosure, obviously, the scheduled service disclosure is the same as everybody else out there. You provide pretty good cargo disclosure in your documents. Well, are there charter KPIs or anything you can do on that side of the business to help-
Yeah
... help us understand the profitability, the opportunity and profitability there more?
Yeah, we probably could. I think we tried in the last earnings call to talk a little bit more about revenue per block hour on the charter side.
Mm-hmm.
But I don't think we've probably gotten those metrics out enough.
Right.
I think we could probably do more to help people there.
Yeah, 'cause it, it's just a bigger unknown part of the business, and-
Yeah
... you kind of the visibility in terms of how much you're flying there or the, you know, kind of the opportunity for growth.
I mean, for the airline overall, the most relevant metrics are revenue per block hour and cost per block hour. Now, nobody sort of looks at it that way.
Nobody looks at it.
... so that's, again, it's difficult. So we have, you know, we gotta sort of get people focused on the scheduled service business in a traditional way, and then more revenue and cost per block hour stuff on the other segments.
Right. Okay. Another minute or so left if any questions from the audience. If not, maybe we can wrap it there. Any questions? Well, great, Dave.
Thanks.
Appreciate it.
Appreciate it.
Thank you.