Last but not least today, we have Dave Davis, the Chief Financial Officer of Sun Country Airlines. Dave, appreciate you coming to the conference again this year.
Thanks for having me.
Absolutely. You know, maybe let's start on everyone's favorite topic, and that's just kind of the demand revenue environment. You know, Jude was talking about on the last call that, you know, you're certainly expecting a strong summer season. You're gearing up to grow substantially. I think every other airline sort of echoes that sentiment. You know, I know 3Q for you is sort of peak, can you maybe talk a little bit about maybe some of the structural differences that you're seeing in terms of peak versus off-peak demand and what you're, what you're doing to address that?
Yeah. Let me sort of describe as I answer the sort of our airline for those of you who aren't that familiar with it, whether they're here or on-online. Actually, the first quarter is our biggest quarter. Third is almost the same size.
Yeah.
First quarter is our biggest just because September is so low for us. We've heard a lot of this about the peak versus off-peak demand differentials. This airline is designed to operate in very peaky environments. Our schedule at off-peak periods is about half the size that it is in peak periods, just in normal times. We really haven't seen any softness in off-peak periods, and if we did, we would just pull it down and pull it down more.
Mm-hmm.
Yeah. There's been really no TRASM weakness other than what you would normally see at off-peak periods for us or demand weakness. There's a lot of strength on the in the peak periods, like, you know, tremendous strength for us. The other thing is, you know, our business operates through three segments. We've got a scheduled service business. We've got a charter business. We've got a cargo business. What we tend to do is fill in some of those trough periods with more charter flying. The cargo stuff is pretty flat. Our peak to trough capacity allocation, like I said, for scheduled service, it's about half off-peak months versus peak months. If you add charter and cargo to that, it's more like 75% of the trough months versus 100% are the.
Oh, okay.
-are the peak months. We can live with scheduled service weakness in trough periods and fill it in with more charter flying in which there's a ton to do.
Got it. Would you be willing to share what the, what your RASM differentials are between peak versus off-peak? I think Frontier was saying today that it used to be like a 19% differential, and it's moved to like a, you know, 25%, 26%. Has it moved meaningfully for you? Or because of your model, you've always flown that way, has it been a little bit more stable?
That's interesting that they said that. The difference between our peak and off-peak, unit revenue is about 25%.
Okay.
That's typically what it's always been.
Okay. Interesting. I guess what's your everyone knows summer's going to be good. I've been writing in some of the data that I see is just like in the domestic market, just kind of a general kind of sluggishness in bookings. It's not rolling over. It's not getting meaningfully worse. It's just maybe coming off of peak a little bit. Do you see any evidence of that?
We have a schedule published now through the third quarter. We'll be sort of rolling that out further, soon. There's really no weakness. I mean, we're not gonna continue to see 30% unit revenue increases...
Right.
on top of every strong quarter that we've had in the past.
Mm-hmm.
If I look sort of forward into 2Q bookings and into 3Q bookings, both loads and unit revenue are at or better than they were at the same time in 2022 looking forward.
Yeah.
We're not seeing any weakness. I mean, if anything, the issue for us is just we're smaller than we should be. But there's sort of no revenue in... Sorry, no weakness in any of...
Okay.
any of our markets.
The charter business, who's your typical customer there?
We sort of operate our charter business through. It's a number of different customers, but sort of the main customers would be sports teams, casinos, U.S. military, then a bunch of ad hoc customers.
Okay.
you know, a whole variety of things. The business operates. There's sort of two sections to our charter business. There is the portion that is business under contract.
Yep.
There's what we call ad hoc. Business under contract would be four or five-year deals that we have with various folks to basically do their charter flying for them.
Mm-hmm.
On the ad hoc side of the business, it would be sort of U.S. military stuff, a lot of, let's say, football charters, basketball charters, stuff that you'd sort of pick up on a fairly near-in basis.
Okay.
We used to be split 50/50 between the ad hoc business and the, just the.
Contract business.
business under contract. The business under contract for us has grown substantially. We're probably 80% under contract right now, 20% ad hoc. We now have MLS Soccer, who we do all the flying for.
Okay.
We've grown our casino contracts.
Those with local, kind of regional casino operators?
No, they're with Caesars and other national-
Got it.
national chains. It's not like, you know, we have a 186 seat configuration in a 737 NG. This isn't high rollers, you know, heading to the suites in Vegas.
Yeah.
It's people, in the Midwest flying to, like, secondary properties.
Yeah.
that these casino company
Interesting. You said the only problem that you have right now is that you're not flying enough. What are your capacity constraints?
The largest capacity constraint that we've had at the company now for probably nine months to a year has just been pilot production. I wanna differentiate that between pilot production and pilot availability, because we signed a brand-new pilot deal at the end of the fourth quarter of 2021. Since then, our attrition is down massively. We're able to hire all the pilots we need. Our problem that we've been working through and making a lot of progress on is just production, the training pipeline, getting guys through that training pipeline and onto the line flying.
Why is that?
There's some fairly technical reasons for it, but I think you can think of it largely as an instructor availability issue.
Okay.
We've had issues in two places. One is instructor availability, and the second is getting people to upgrade to captain positions, which you would think would be very straightforward given the pay change. We've had a little difficulty there, too. This line check airman issue is sort of the pivotal issue. We only had five line check airmen last year. We now have 19. We're trying to drive that number to the high 30s.
What was it in 2019?
Probably around five.
Oh, really?
Yeah.
That's how many pilots you're putting through training.
Well, that's how many instructor pilots we have to.
Mm-hmm.
-to instruct pilots and put them through training. That's a bottleneck in the pipeline.
Mm-hmm.
That number was relatively small, and it's sort of been consistent. Our pilot production is we've ramped drastically sort of in terms of how many pilots we need. Really post-COVID, we've ramped.
Mm-hmm.
Remember, in 2019 we were a certain size. In twenty-
Sure.
We shrunk the passenger service business, grew the cargo business.
Mm-hmm.
In 2021, we sort of had everything going, and we've been kind of growing since then.
Yeah.
We're up to 19 line check airmen. Like I said, we wanna get that to the high thirties, but that's our top constraint on growth rate.
Got it. Anything changed of late on in terms of attrition? I think one of your ultra-low-cost peers talking about on their call that they've recently saw maybe a little bit of a tick up. They didn't know if it was a blip yet or not. Any. Like, it seems like attrition across the industry has normalized a little bit. Are you seeing the same thing or are you seeing that blip?
We are not seeing that blip at all. I mean, if I look at our attrition rates, we're actually running below what our plan was. Attrition from, let's say, the first quarter of 2023 back to the first quarter of 2022 is down significantly. It's even down sequentially. Like, from Q4 2022 to Q1 2023, it's down.
Mm-hmm.
Attrition has been a bright spot for us, and it sort of partially offset that sort of glitch in production right now.
Got it. If you have gone from 5 to, what, 19-
Mm-hmm.
check airmen, you would think some of these training issues would get themselves worked out. What's the timeline there? Like, when can you get through and get back to more nor. You know, I got. You know, I was teased earlier today talking about normal levels of utilization because there's probably some level of new normal. Based on your plan, when can you get back to those?
Yeah.
that level of production?
First of all, we've made a lot of progress. We produced about 35% more pilots in the first quarter of this year than we did in the first quarter of last year. The production's happening. We're making a lot of progress, and it's sort of accelerating..
Mm-hmm.
I think we've said that publicly that our growth rate this year will be between sort of, let's say, low double digits. A lot of that is centered around Q3, some of it in Q2, and we're on track to hit those.
Okay.
Significant growth in the next couple quarters for us.
Yep.
From a utilization perspective, this sort of gets into, I think, cost issues and other thing, let's just say CASM issues. We have been taking aircraft, in getting our utilization to where we need it to be or where we want it to be, probably a mid-2024-
Okay
-kind of an issue. You know, so our utilization is lower than we need it to be. We have a new pilot deal in place. We were the number one performing airline in the country in the first quarter. We're generating high margins. When I look at the rest of the year, it looks very strong. Growth for this airline should come at very high incremental margin.
Mm-hmm.
We have the aircraft in place. We actually have a lot of the pilot bodies in place. We just have to get them through training, which means that incremental growth comes at very high margin on top of the margins that we're already generating.
Yeah. With this, quote, unquote, "significant growth" that you have coming for the next few quarters, I think other airlines have a similar type of mentality, largely because of the pilot training backlogs that a lot of these, you know, these airlines have right now. Given what you're seeing in demand, do you think the industry can handle the incremental growth, not just from you, but from the industry at large?
I guess it depends on what the actual growth turns out to be.
Yeah.
You know, as I said, we have a schedule loaded for the third quarter that's reflective of this growth, and it's selling very well.
Fair
... and at high-
Yep
at high fares. In our markets where we fly, it seems like it's not an issue. Like I said, we are smaller than we need to be, underserving a number of markets, both from a frequency perspective and from a number of markets perspective where we should be bigger.
Right. Okay. What are some of the markets that you feel like you should be bigger in?
We believe it or not, despite all the capacity adds, there's almost an insatiable demand for Florida flying.
Really?
Yeah.
Even today. Okay.
Like, yeah, Fort Myers. Fort Myers has been rebounding you know, really nicely from the hurricane.
Yep.
The other places that we fly in the West Coast of Florida have been very strong. Some of the big city stuff like, you know, we really don't target business traffic at all. Some of the larger East Coast markets for us, like New York, Boston.
Interesting
... markets like that, have been fairly strong, and I think what's happening there is legacy fares have gotten so high that, like, small business men.
Okay
... are kind of like trading down to us...
Interesting
flying on us to some of these big business markets.
Interesting.
Yeah.
One of my next questions would be like, do you feel like that we're at a point in the industry where maybe the consumer is pushing back on price a little bit, right? Like, I mean, you know, in my years of covering this space, granted, they're not very long years, but, like, we've gone a full year now of consumer zero pushback on, you know, on these, on these higher fares. Like, maybe that's showing that, you know, to some extent the consumer is pushing back and trading down a little.
Yeah, maybe that's true to some respect. You know, like, if you look at, like I said, unit revenue, we're not gonna see 30%. There's a sort of.
Yeah
... flattening, right?
Mm-hmm.
I don't think that these big fare increases keep coming forever, but so far. All I can do is look at the evidence. There's no weakness in demand.
Yep. What's your core demographic? Maybe when you think about your business, right? Predominantly leisure, right? What, you know? How much is leisure versus maybe some of that smaller corporate, if you can tell the difference?
Historically, our... It's probably been 97 3-
Okay
... leisure business. you know, maybe it's a little bit larger than that now.
Yep.
You know, I don't have the exact number.
Yeah.
The airline, like I said, it's very day-of-week focused, very month-of-year focused. You're a business person who wants multiple frequencies...
Yeah.
... and multiple days, you're not gonna be searching the Sun Country website for.
Mm-hmm
... for flights.
Right.
That's fine.
Yep.
We operate out of a separate terminal out of Minneapolis, you know. Other leisure carriers are there. We're just fine with that sort of separation of operations.
Mm-hmm
at the airport.
Yep. Makes sense. Of that leisure customer, what's kind of general demographics?
So-
You know, particularly, you know, these days I get a lot of questions with regards to income cohorts and, you know, in our Bank of America kind of credit and debit card data, our econ team has been talking about a little bit more of a slowing in the higher end. You know, last year they were talking about a little bit of a slowing in the lower-end consumer. You know, I've always told them, like, travel, it's not low. Like, it's not lower end. Like, travel.
Right
is typically a mid to higher end income cohort. Just given your model, what's your kind of typical demographic?
If you look at sort of, let's just say, demographic cohort like age and this kind of stuff, it's actually pretty evenly spread. Think of it as families going to Florida, families going to Cancun, that kind of stuff.
Yeah.
Single people flying to visit family and relatives at cities around the country. So it spans a wide age thing.
Yep.
The data that we've seen on sort of average income, it's probably a little south of $100,000 a year average household income. Again, there hasn't been any sort of slowdown in that. We're not exposed to much higher income business traffic. You know.
That's right. Yep
... who are paying a lot of money.
Yep.
I don't know if there's any weakness in that, in that world or not.
Right.
there isn't.
Okay
... sort of middle income world.
Yep. Understood. How do you think about just longer term growth, right? You know, how do you source aircraft for that growth potential?
We've sort of said, you know, on a steady state basis, vary from year to year, but if we're looking at sort of 15% block hour growth, on an annual basis, some years a little more, some years a little less, that's sort of where the airline.
Okay
needs to be. You know, we're not just pursuing growth for growth's sake. It needs to be cash flow generative. Wanna protect our margins. Here's the interesting thing, lead perspective. We take one more aircraft this month, one more aircraft in December, okay, of this year, then we are good for 2023. With the exception of maybe another aircraft, we're good for 2024.
Really? Okay.
Yeah. Our aircraft utilization is probably 15% below where.
Right
where it needs to be.
Right.
Our fleet count in the first quarter of 2023. About 20% higher than it was in the first quarter of 2022 on a 4% increase in block hours. Utilization is down.
Okay.
There's a lot of utilization to be had to get back. When we get into 2025, we just did this Oman Aircraft deal.
I was gonna ask you about that next.
Yeah.
Pretty unique.
Yeah. That's 2025 lift.
Mm-hmm.
We're probably 3, 4 more aircraft in 2025, and then we'll be back on more 8, 9, 10 aircraft in 20-.
Right.
Our CapEx numbers are low.
Right.
-for the next few years.
Yeah. Great. How did that Oman deal come about?
We're always sort of in the market looking for lift, you know, because our fleet model is low cost, mid-life, 737 NG.
Yep.
NGs. That's what we buy. We look at dozens of aircraft for every aircraft that we sort of purchase. One of the things we were sort of trying to do is how do we get a little bit maybe chunkier instead of 2 airplanes here or 1 airplane there. We sort of approached a lessor in Germany. It's actually a group of lessors, but the manager of the leases.
Mm-hmm.
We approached about buying out some end-of-life leases that sort of expired over the next year. We basically struck a very economically advantageous deal with them to buy 5 737-900ERs, which is a bigger aircraft for us, which is perfect for some of our markets. Now we're a lessor until end of.
Right.
into the end of 25. Basically, we will be a lessor. The aircraft will redeliver to us, we will induct them into our fleet, and then...
Got it.
it's an accretive deal now because the lease income is high.
Mm-hmm.
it'll be even better once they're...
I see. I see. What are some of the other ways you're looking into or thinking about sourcing aircraft?
We literally talk to lessors, other airlines.
Okay.
Yeah.
You name it.
Whoever around the world, we have a list of potential prospects.
Okay.
The market for used 737s is tightened up a little bit. It's sort of good that we've got most of our fleet in, but the used aircraft market is a little tougher than it was, let's say, a year ago. Prices are just a little bit higher. I think... the other issue you've got is-
Do you think that's because Boeing can't deliver on time?
There's basically delivery issues there.
Yeah.
people are extending leases.
Okay.
not getting rid of their aircraft, all that kind of stuff.
Yeah. Okay.
In our model, we do not enter into operating leases, almost exceptions, we buy the aircraft. We're gonna operate them till end of life. We're gonna manage the maintenance program. We're gonna manage the engine maintenance program, we need to own the airplane. We're looking for aircraft we can buy.
Mm-hmm.
into our
Changing gears a bit and moving on to costs, right? No surprise, cost inflation has been the key theme over the past year or so. Do you see that continuing? Do you see things easing right now? What are still, like, the biggest kind of pain points that you see from an inflation perspective?
I think from our perspective, which might not be the same as everybody's perspective, we sort of hit kind of a rough cost plateau. The biggest issue for us over the last couple of years, a year, I'd say last year, has been our new pilot agreement.
Yeah.
The wages at this company were very low. There was a significant step up. Yeah, exactly. That's now in our numbers fully. The work rules that had to change are in our numbers fully as of the first quarter of this year. There's maybe some wage pressure with, like, our flight attendant group, but it's a rounding error.
Yeah.
compared to the pilot numbers. I think a lot of those costs are baked in. The issue for us is back to the thing I was talking about before.
Yeah.
We're oversized.
Right.
Our fleet count is up 20%, our pilot heads are up 20%, and our block hour growth is much lower than that.
Yeah.
We need to get the pilots through training, not pay them training guarantee, and get the aircraft utilized. As we grow into our size, obviously, CASM won't increase, and we should see nice high margin growth.
Do you think you're in a position over the next few years where you can, with that productivity, drive CASM down a little bit?
Potentially, yeah.
Okay.
I think you're gonna see, particularly in Q3, some change year-over-year changes will get much, much smaller as we move into the year. We don't have the 2024 plan done yet, but there shouldn't be a reason if we hit our growth targets that we can't drive that number lower. See some negative year.
Any questions from the room before I move on? Mike is coming.
Let's see. I had a couple more macro questions. One is, with lower fuel prices, do you see any new markets that you might be able to go into?
Of, a few months ago. 2, on, with higher interest rates, are you seeing, leases becoming more expensive? Is that getting passed on?
First of all, on the, on the new market front, I would just say maybe marginally. The issue for us is not new market opportunities, it's having the capacity to be able to deploy into markets. Marginally lower fuel prices is gonna mean maybe frequency adds, a few new markets, but I don't think it's substantial enough yet or permanent enough yet to make those decisions. From a lease rate perspective, or let's just broaden it and say from a financing perspective, since we don't do any operating leases, on the financing side, it's more expensive. Almost all of our deals are done. Our fleet is largely in. We did do some financing on the, on these five aircraft in Oman.
I think we got a very nice deal, but it's higher cost than it was for the aircraft we bought a year ago.
Yeah.
You know. It hasn't substantially changed the equation of profitability or where we, where we buy.
I have just a couple more before we finish up and get you to the airport, maybe avoid some of the Boston traffic. I guess maybe on the cargo side, right? I know up until recently, the cargo operation from a profitability perspective, there was kind of that timing mismatch between the... Right, you're paying your pilots more, but the Amazon rate contract didn't reset. Is that on the horizon? Is that reset? What's kind of-
We just had a reset. Just think of every December, there's a.
Okay.
An escalator. We just had an escalator in December.
In December. Okay.
Our pilot costs are up. That's the biggest cost component in our Amazon business.
Yeah.
Because they pay for the fuel, they pay for the aircraft, so it's really pilots.
Yeah.
That's what the whole cost is there. That has diminished the profitability of that business.
Yeah.
It's gonna take a couple years for us to catch up to that.
It's a couple years.
Yeah, it is.
Okay.
I mean, because when you look at the increase in pilot costs. That said, it's a very cash flow accretive business for our company.
Mm-hmm.
It is a good, very steady base of business, very predictable, known revenues.
Yep.
on what is otherwise an incredibly, you know, volatile schedule. It's a nice stabilizing factor for us.
Got it. Okay. Do you think there's opportunity to do more with Amazon?
Um-
Would you want to do more with Amazon?
I think probably the answer is both is yes to probably both of those. Given sort of where we are and what the passenger landscape based on the passenger perspective, that's a future decision for us. In other words, I don't think we're very interested in taking on significant additional capacity on the Amazon side now.
Okay.
You know, maybe in sort of 2024, 2025 timeframe.
When you get more planes maybe?
Well, when we get more pilots-
Yeah.
That kind of stuff. You know, when we're sort of let's say fully steady state.
Mm-hmm.
We get to you know, talk about growing into that. I don't, I don't think that's right now.
Got it. Last one from me. When you're at conferences like this, meeting with investors, what do you think is, like, the biggest maybe misperception that investors might have on Sun Country?
I don't think people understand sort of the stability and the design of the model because it's pretty unique. You know what I mean? I mean, when we state growth figures, we state them in block hours instead of ASMs because we have a cargo business that doesn't generate any ASMs. I think it's really the fundamental understanding of this very peaky business model diversified across three different businesses-
Mm-hmm.
that maybe isn't understood as it sort of could be. We're fairly unique from other carriers.
Right.
People who've done a lot of work on us understand the model, understand the resilience of the model, but others maybe not as much.
Right. I mean, you've done a great job with the balance sheet. You're one of the few airlines doing any sort of meaningful capital returns.
Yeah.
Do you think you'll continue to be active in that respect?
We announced, what was it? Third quarter or fourth quarter of probably third quarter of last year that we were going to do a $50 million buyback. We're almost all through that. I think our stock is really low. I think we believe it's too low, so we think it's a good buy for us. This hasn't been something we've vetted with the board yet, but I think there's probably an opportunity to buy back more of our equity.
Last questions from the audience? Great. Dave, thank you.
Thank you.
Appreciate it.
Thanks, everybody.