All right. Well, good morning, everyone. Welcome to Barclays, second day of our 42nd annual Industrial Select Conference. I'm Brandon Oglenski, Airline and Transport Analyst, and very excited. I think we're wrapping up our firesides here with Sun Country Airlines and Dave Davis, Chief Financial Officer of the company. Best for last. That's right, and actually, you guys do have a very unique business model that I think we're gonna get into here. But very quickly, for those in the room, if you don't mind, one last time from my sector at least, let's do the audience response questions, and airlines have been more favorable to this conference than in past years. So do you currently own Sun Country? Overweight? Market weight? Or underweight? Or no? All right. Question number 2, and we appreciate those that do participate. What's your general bias towards Sun Country right now?
Positive, negative, or neutral? All right. And then question, number three, please. In your opinion, through cycle EPS growth for Sun Country will be above peers, in line with peers, or below peers? All right. Well, Dave, thank you very much for joining us today. Appreciate you being here.
Thank you.
I think, you know, for those that maybe don't travel to or around the Minneapolis area, might not be too aware of who Sun Country is, but, you know, small scheduled passenger airline. Well, I shouldn't say small, it's all relative. But, about 40 aircraft on the scheduled passenger side, and you're operating, is it 12 right now for Amazon?
Yeah. On the airline, sort of by, let's say, the middle of this year, will control about 70 aircraft.
Okay.
So it breaks down. There'll be 20 freighters, about 45-46 aircraft in the scheduled service fleet. And the rest, our aircraft we actually own that we have out on lease to a couple other carriers.
Okay. Well, and I think, you know, we've covered you since the IPO, and Apollo just sold down completely. Is that right?
Yeah. So the IPO was in March of 2021, and they've been doing sell downs sort of gradually ever since, and the last slug went out a couple weeks ago, so they're no longer a shareholder.
I guess, you know, as we go along this journey, I think people still don't quite understand your business model, just based on the questions I was hearing on the last earnings call. 'Cause what I want, I wanna make very clear to folks here that you don't take risk on cargo capacity. That's literally contracted flying.
Yeah.
That you're doing for Amazon.
Yeah, yeah. Yeah. So we still get questions about whether sort of cargo volumes up or down, how that's gonna impact us. The answer is it doesn't impact us. We operate today 12, going to 20 by mid-year freighters all for Amazon. The business is not. Our compensation is not linked to the volume of material in the aircraft.
Yep.
It's driven by the number of aircraft we fly and the number of block hours we fly. So changes in demand would only affect us if it caused Amazon to take their schedule up and down, which hasn't been the case so far.
Right. And that's a long-term contract that you.
Yeah. So we entered into this deal in December of 2019, right before COVID, and we now just extended it. When we took in eight additional aircraft, we extended it to at least 2030 with some potential further extensions built in.
And in this contract, you're literally providing the pilots and the operating for your.
It's really attractive flying for us because it integrates really well with our passenger business because of the way the scheduling is done. But it is basically almost zero capital cost. The aircraft are owned by Amazon, or let's say they're leased by Amazon and then sublet to us at no cost. We provide crew, line maintenance, and insurance. It's great flying.
Can you talk about the profitability of the business?
Yeah, so the business is, it is a significant contributor to Sun Country. I can't get into the details of the contract. You know, as we've said before, when we signed when we re-upped with Amazon in June of 2024, the contract changed. There are some rate escalators in there. So by the time we get to sort of 2026, steady state when all the aircraft are in, the contribution of the Amazon business and the passenger business are about the same.
Oh, wow. That's pretty significant then.
Yeah.
and I think previous.
Sorry, I don't mean it from an absolute dollar perspective, from a margin perspective.
Got it. And is there protection for potentially a new pilot contract, which I think becomes amenable next year? Is that right?
Yeah. So there's not a cost escalator that relates directly to our cost. But there are annual escalators that kick in every December. So basically, if the pilot costs go up, margins gonna may go down a bit, but then it sort of catches up as the escalators happen.
Okay. Well, it may be just backing up here more broadly 'cause, again, I think investor appetite for airlines is finally, you know, at a level that we haven't seen in a while. How's the industry backdrop playing out, on the scheduled passenger side?
Yeah. So in our markets, and I think generally, there's been a lot of capacity discipline. If you look at ULCC capacity in our markets in the first quarter, the number of seats is down like 40%-50%. So there's been a big reduction in our markets in ULCC capacity. Legacy capacity's sort of up mid-single digits, but a lot of it's not sort of overlap with us. So the capacity backdrop right now is very favorable. You know, last year, it wasn't so great. Everybody grew a lot, including us. This year, much more marginal growth, and it looks good going into the second quarter.
Okay. And what can you tell us about, I think your first quarter revenue guidance was pretty good sequentially. Is that right?
Yeah. First quarter is our strongest quarter. You know, we're 100% leisure carrier. A lot of it in the winter is north-south, taking people from cold climates to vacation destinations, and it's our strongest quarter by far, and this will be a strong, strong quarter. Put it that way.
Okay. I guess bookings are trending in that direction, just as you.
Yeah. So the first quarter looks good, as I said. Second quarter, you know, we have visibility, let's say, into April, a little bit into May at this point. April looks very strong. And, you know, that's driven by, I'm assuming, strong demand, capacity discipline, and the Easter shift, which is a big deal.
Okay. And how much points of revenue does that usually move?
Hard to sort of say. Maybe a couple points.
Okay.
Or RASM points.
But this year, because of the ramping up of the Amazon contract, you're actually gonna pull pilots out of scheduled passenger service.
Yeah. So if you look at our capacity profile, sort of up mid-single digits year over year in Q1, shrinking 7%-ish in Q2, 10% in Q3, and then kinda mid-single digit shrink in Q4. And the reason for that is, all of the block hours we can generate are dedicated to growing the freighter business from 12 aircraft to 20 aircraft. That's gonna necessitate a bit of a pull down in the scheduled service business. 2026, all the freighters will be in, and then we will resume growing on the passenger side.
Okay. And when you cut capacity, what's the decision?
I mean, it's the most marginal flying. Right. So, I mean, it's the model the Sun Country model is relatively unique in that we very much are focused on flying at peak periods to capture maximum unit revenue. So we look very route-by-route, very granular. That's how the cutting will take place. There's not strategic markets or things like this. The most marginal routes will be the first ones that go. And the number of destinations we're reducing is actually relatively modest. It's probably gonna be more frequency that comes out.
Okay. Should we be thinking then very margin accretive this year?
Yes. That should be margin accretive this year. Absolutely.
Along with the step up in Amazon rates and flying, right?
Exactly.
So, I guess from a margin profile, though, you guys are near industry-leading. Is that correct?
Since we came out of COVID, we've led the industry in profitability in, I think, 2021, 2023. 2020 last year, we were just behind a couple legacy carriers. But the most profitable low-cost carrier in the industry. And I expect to repeat that as we go into 2025.
And a lot of that just has to do with your ability to really focus on peak flying. Is that right?
It, the model works in a really integrated way. So on the scheduled service side, the business, as I said, is focused on capturing revenue during peak periods and not flying during periods of lower demand. So as an example, we'll have twice as many ASMs flying in March as we do in September. So the schedule is very, very highly variable. That's linked to our fleet strategy, which is mid-life, 737 N Gs. So relatively low-cost fleet strategy. We can justify aircraft just with peak flying. We don't need to be flying them in off-peak periods to cover, you know, high aircraft fixed costs. So that's one aspect of the model. The other aspects of the model are our charter business and our cargo business. The cargo business I just talked about is 100% under contract, very steady throughout the year.
The charter business, about 75% of that business, is under long-term contract, also steady, so they kind of offset the peakiness of our scheduled service business. The fact that it is all 737-800s means our pilots move seamlessly between all three segments. They bid, so the costs are shared across all the segments of the business.
How's the charter market right now?
The charter market is generally good. You know, in the last few years, we've signed a few pretty significant contracts with MLS and others. You know, there's other opportunities to be had on the charter side that we are actively pursuing. But I would say the charter market is pretty strong right now. Pretty strong. One of the things about the charter business for us is we don't compete in a lot of areas that require unique configurations. So unique interior configurations. The interoperability, the interchangeability of the aircraft between scheduled service and charter basically means we have 186-seat config flying in both.
Okay. And there you're protected on fuel prices, right?
Yeah. About a third of our capacity, we are basically hedged against fuel price movements because Amazon pays for their fuel.
Yep.
The charter contracts are a fixed fuel price. If fuel goes up, we get paid more.
Okay. And obviously, your home base is Minneapolis. You have a lot of overlap with Delta. How's that competitive overlap played out over the last couple of years?
I would say we try to. I think we serve a different market niche than Delta does. First of all, we operate out of a separate terminal at the MSP Airport. Our business is focused on 100% leisure travel during peak periods. We do not pursue business customers. The average Sun Country traveler might travel twice a year. Families go this kind of thing. The bread and butter sort of business customer is not what we compete in. So from our perspective, I think we coexist fairly well at Minneapolis. Now, we have overlap on many different routes, and, you know, we're gonna try to be the price leader when those overlaps occur.
Okay. There's been a big push in the industry, and we've had a lot of airline executives here, you know, over the last two days talking about premiumization, decommoditizing travel. Is that trend that you're seeing in your business as well?
The way the aircraft are configured today is we have a sort of a Southwest-like product. We have more seat pitch than the other ULCCs, better quality seats. And then the first five rows are extra legroom seats. We've been selling those for, you know, five or six years now. I don't think you're going to see big changes in our product. I think we're very happy with the product as it is. The sort of financial results speak for themselves. We're not gonna try and out-premium, you know, legacy carriers. That's not our niche. We're a leisure carrier, focused on leisure passengers.
Okay. If there's any audience questions, just raise your hand. We'll get you a mic, so as you look into 2026, I think you've already you have some 737-900s that you purchased but are on lease with another airline, right? So how does that kinda factor into the fleet?
Yeah. We have seven aircraft right now that are on lease to two other carriers, not US carriers. So the way we've sort of tried to set this up is, our growth in 2025, as I was saying, will be all on the cargo side. In 2026 and 2027, with all the cargo growth in, we'll be growing the passenger business again. And we're gonna grow that with a combination of mileage utilization on our aircraft and lease aircraft off of lease, which we already own. So the benefit is basically we probably have three years of growth built in at no additional CapEx, no additional aircraft.
Right. 'Cause you've spent the capital and.
Yeah. We own the aircraft at this point.
So what's a right level of maintenance CapEx in the business?
We'll probably spend $90 million-ish this year. Last year, we spent in the $80 million range. You know, a lot of that is spare engines. And then it can spike up if we're buying new airplanes, which, again, we're, we're, you know, don't need to do for a while.
Can we get a microphone up here, please? Thank you. And maybe while we do that, can we queue up question number four for the audience, please? In your opinion, what should Sun Country do with excess cash, bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown, or internal investment? Thank you, everyone, for participating. All right. John, did you have a question?
Hi, Dave. Thanks for taking my question. As the operations shift more to cargo later this year, is there any opportunity for, like, better cost efficiencies, or are you gonna see more or less overhead costs? And then I was also thinking with premium pay that you've had to pay on the scheduled passenger pay for pilots, is there potential alleviation in that, in the back half?
Yeah. I mean, you know, we already have a cargo business up and flying. So the additional overhead that we need to take on for the additional for the other eight aircraft that are coming is minimal. I mean, very minimal. So, you know, we should get bigger without having to add any fixed cost from that perspective. Sorry. What was the other part?
On, like, premium pay for pilots.
Yeah. Yeah. So from a premium pay perspective, the pilot situation at the company has gotten much improved, much more stable from what it was, let's say, two years ago. Two years ago, we had, basically a shortage. So we were having to pay out a lot of premium pay to get guys to pick up hours. That situation's gotten much better. We can basically hire the pilots we need to hire. So the premium pay situation was better last year and will be better this year, mainly driven by that.
And then, a question around the network in Minneapolis. You've stated JetBlue has largely exited the market. Are you kinda backfilling their schedules, or, with, I guess, continued growth, how much more on-peak growth do you see in Minneapolis, or are you starting to look outside of,
So yeah. JetBlue pulled out of the market. You know, we haven't responded directly to that. There is opportunity still to grow peak flying and new destinations out of Minneapolis for us. We have been growing in other regions like Wisconsin, Milwaukee, Madison, cities like that. That's sort of really fertile ground for us. But the reality is, we're not going. 2026 will be basically, for the most part, adding back flying that we took out in 2025 to support cargo growth. So it's really not a real issue for new markets until we get into sort of the 2027 timeframe. And we still think there's opportunity for Minneapolis flying as well as sort of more focus on some of this Upper Midwest stuff.
You know, like, right now, in addition to Minneapolis, we also operate a network out of Dallas in the summer. We do a lot of beach traffic, Mexico stuff out of Dallas. So there's gonna be opportunities like that around the country as well. But the Upper Midwest is kind of the company's bread and butter, at least for the next several years.
All right. Can we queue up question number five, please? In your opinion, what multiple of 2025 earnings should Sun Country trade?
Hopefully, it's all quiet. It's all number six.
There's one person in here. Can we go to question number six, please? What do you see as the most significant headwind for Sun Country? Core growth, margin performance, capital deployment, or execution? And, Dave, while we wait for these results, I guess I wanna come back to the cost efficiency question.
Mm-hmm.
How's that gonna play out, especially as you're shrinking the schedule a little bit, this summer?
Yeah. So from a CASM perspective, we've had our costs pretty well in control. So we grew CASM in 2024 over 2023 between 2.5%-3%. This is adjusted CASM, ex-fuel, which I, you know, close to industry leading, I believe. 2025 is gonna be, as I sort of said before, mid- to high-single-digit CASM growth we expect, largely driven by our shrink. So we, as I said before, we grew in the first quarter, shrinking in 2023 and 2024. The net of all that is probably down 3%-5% for the year. That's gonna result in sort of these CASM numbers I just talked about, you know, mid- to high-single-digit.
Okay, but thinking beyond into 2026,
Yeah.
You will have an amendable pilot agreement. Is that right?
Our pilot agreement becomes amendable in December of this year.
Okay.
You know, people who know the industry have a sense, I think, of how long it takes to negotiate these things. So there's going to be changes in pilot rates coming down the line. It's probably not something that impacts the company for 24, 36 months, frankly.
Okay. But how do you think about managing through? 'Cause obviously, wages have gone up for pilots, right?
So we had a basically a little bit of history. So the current team sort of showed up in the 2017, 2018 timeframe, just right around the Apollo acquisition. The company had struggled a lot before that. So the pilots were underpaid because of the smallness of the company, the struggles that the company had. They had a really old contract. So we had a really big increase when we did our new pilot deal at the end of 2021. That increase is not gonna repeat. So that was sort of a one-time corrective to get us back into the, let's say, peer-set.
Yep.
Compensation world. We'll see what happens with others and what the world looks like. But I wouldn't expect anything close to that going forward, those kind of increases.
Okay. Got it. And then, you know, we only have a couple minutes left here, but a topic, you know, in airlines has been M&A. And obviously, Frontier's made it very clear that they wanna acquire Spirit.
Mm-hmm.
They've gone here. I don't know. Just how do you see the landscape playing out? And would you guys ever participate?
I mean, I think we've talked about this publicly a number of times. I mean, we're pro-M&A. We think there are combinations that make sense. We think there are combinations that make sense with us as a part of them. The uniqueness of our model makes it a little more difficult for us. You know, we got 20 freighters.
Yeah.
This kind of thing, which is, which is different than some of the other stuff, but we think that there's combinations with Sun Country that make a lot of sense, and we'll continue to look at things. It's certainly not our, not our base plan, but I do believe that the industry needs to consolidate on the, on the low-cost side, and you know, participate in that as needs be, but it feels like some combinations are coming relatively soon.
All right. Well, Dave, thank you very much. Great business you guys have.
Thank you.
Thank you.
Appreciate it, Brandon.