Sun Country Airlines Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 28, 2023

There are 10 speakers on the call.

Operator

Hello, and welcome to the Sun Country Airlines First Quarter 2023 Earnings 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 presentation, there will be a question and answer Please be advised that today's conference is being recorded. I will now turn the call over to Chris Allen, Director of Investor Relations.

Operator

Mr. Allen, you may begin.

Speaker 1

Thank you. I'm joined today by Jude Bricher, Chief Executive Officer Dave Davis, President and Chief Financial Officer and a group of others to help answer questions. Before we begin, I'd like to remind everyone that during this call, the company may make certain statements and constitute forward looking statements. Our remarks today may include forward looking statements, which are based upon management's Our current beliefs, expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially.

Speaker 1

We encourage you to review the risk factors and cautionary statements outlined in our earnings release And our most recent SEC filings. We assume no obligation updating forward looking statements. You can find our Q1 earnings press release on the Investor Relations portion of our website at ir.toncountry.com. With that said, I'd now like to turn the call over to Joon.

Speaker 2

Thank you, Chris. Good morning, everyone. Our diversified business model is 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 We believe due to our structural advantages, we'll be able to reliably deliver the industry leading profitability throughout all cycles.

Speaker 2

Core to our low frequency model is being able to deliver excellent operational results. And again, we've done that and through a difficult winter. We finished the quarter with 99.9 percent controllable completion factor in our scheduled service. Thank you to all our team members working every day to deliver for our customers. I'm proud to announce our Q1 adjusted operating margin of 20%.

Speaker 2

I get plenty of questions from the investment community about what Sun Country results would look like in a normalized I thought it would be helpful to highlight some of the conditions in the Q1, which are rare historically. 1st fuel prices in the quarter were high. I'm not taking a market position on fuel. We manage fuel prices with our variable capacity model. Further about 40% of our flying has fuel as a pass through.

Speaker 2

I want to point out however that during peak periods like March, we fly as much as we're able. So fuel prices during that time are passed through directly to results. Today, we're buying fuel about 60% cheaper than we were And the Q1 average price. Secondly, we had particularly challenging weather this winter in Minneapolis. Challenging weather isn't Rare, but our network is focused on Minneapolis this time of year and the Twin Cities had one of the top snowfall winners on record.

Speaker 2

That's probably good for demand, but drives a lot of costs in our business. We had 2 major snowstorms that shut down Minneapolis airport, which is rare. The resulting cancels from these closures negatively affected results by several $1,000,000 Some regions of our network posted uncommon results that I don't think we should expect to be recurring. West Florida is a big part of our network this time of year. The region We expect the region to be back next year with higher unit revenues and capacity.

Speaker 2

Minneapolis International in contrast was particularly strong this year. 1Q 2022 was affected by Omicron, so year over year improvement was dramatic. I expect international capacity growth to moderate this region's TRASM in the future. Finally and most impactful, we remain block hour constrained due to staffing. In 1Q 2019, we flew our aircraft 9.7 block hours per aircraft day on average.

Speaker 2

This quarter, our utilization was 7.3. Increasing flying on the same fleet will have substantial positive impact on results. And some I expect future 1Q margins to exceed 1Q 'twenty three more often than not. Looking at the rest of 2023, we continue to See strong leisure demand across our network, which is currently selling through mid December. Of particular note, we expect the recent increase in ancillary revenue We continue to drive positive TRASM trends even as we lap the COVID recovery and increase scheduled service growth rates going into the back of the year.

Speaker 2

I also want to call out a fleet deal that we announced about a month ago. We purchased 5 737-900ERs that are currently leased to another operator until their return and induction in our fleet. We're not opening a new line of business. This is just a way for us to guarantee future capacity growth And get scale in a new variant. We expect these aircraft to contribute more to our results in our operation than while we're leasing them out.

Speaker 2

However, in the meantime, we expect positive impact of about $1,000,000 a month in operating income due to the 5 leases. And with that, I'll turn it over to Dave. Thanks, Jude. We're pleased to report very strong Q1 results, which I'll detail in a minute that were the highest in Sun Country's current history. Total revenue, op income, adjusted pre tax and adjusted net income were the highest they've been since we transitioned Sun Country to the airline that it is today starting in 2017.

Speaker 2

Despite an increase in fuel prices of nearly 8%, adjusted pre tax income for the quarter increased 2 35 versus Q1 of 'twenty two to $52,500,000 The adjusted pre tax margin for the quarter was 18%. I'll start now with the discussion of revenue and capacity. The revenue environment remains very strong. Q1 'twenty three total operating revenue $294,100,000 was 30% higher than the year ago quarter. Total block hours grew by nearly 4% year over year and system ASMs were 1%.

Speaker 2

Scheduled service business remains particularly strong as scheduled service TRASM grew 35% versus last year On a 3.5% decline in scheduled service ASMs. Ticket plus ancillary revenue grew 31% year over year As we saw a 21% increase in total fare to $221.47 and a nearly 9 percentage point growth And load factor to 88.1%. We see signs of revenue strength in the 2nd quarter even as we start to lap some strong gains last year. Charter revenue grew rapidly year over year with a 41% increase in the Q1 versus Q1 of 2022. Our program charter business, which is flying done under long term contracts, drove the growth as program block hours increased 52% versus last year.

Speaker 2

The bulk of this increase was due to increased flying under our Caesars and MLS contracts. Ad hoc charter flying, Which was 14% smaller than Q1 of 2022 continues to be undersized versus both the potential opportunity and its historic level at Sun Country. Demand in the scheduled service business led us to allocate our limited capacity there versus picking up ad hoc trips. As our capacity continues to increase, we expect ad hoc flying to grow substantially. As a whole, we expect charter block hour growth to continue throughout the year.

Speaker 2

Cargo revenue grew 11% in the Q1 on a 5% increase in cargo block hours. As a reminder, Annual rate escalations for this contract go into effect in mid December in every year of the agreement. The cargo business remains a steady cash generative business For Sun Country that serves to smooth the peaks and valleys in our passenger service schedule. Turning now to costs. Our Q1 adjusted CASM increased 14% versus last year.

Speaker 2

Aircraft utilization decreased by 15% versus Q1 of 'twenty two, Which negatively impacted unit costs. Our average aircraft count in Q1 of 'twenty three was 21% higher than last year, While total block hours grew by 4% over this period, we're undersized for the fleet we have in place and future growth should come at very high An important thing to note is that lower utilization levels are not necessarily a drag on overall profitability. Our schedule is highly peaked and designed to maximize unit revenue. So having aircraft available during periods when demand is strongest is important, even if the utilization at off peak times is low. For instance, aircraft utilization in March was 8.2 hours per day, While it averaged 13 hours per day on peak days in the month.

Speaker 2

Adjusted CASM was also impacted by a 26% increase in pilot costs As a contractual increase in pay rates took place January 1 and staffing levels have increased to support our future growth. Turning to the balance sheet. We finished the Q1 with $261,600,000 in total liquidity, including $236,900,000 in unrestricted Cash and short term investments. Our net debt to trailing 12 month adjusted EBITDA was 2.6 times. During the quarter, we also repurchased 750,000 shares of our stock at a price of $19.75 as part of an Apollo Global Management secondary offering.

Speaker 2

We still have $10,200,000 in Board approved share repurchase authority And we'll opportunistically execute any future buybacks. Lastly, I'll switch gears to talk about Q2 2023 guidance. We continue to see strong demand booked into the summer. Total Q2 'twenty three revenue is expected to be $255,000,000 to $265,000,000 which would be 16% to 21% higher than Q2 of 2022. This includes the revenue that we expect to receive from the aircraft that are on lease to Oman Air.

Speaker 2

We expect total block hour growth of 11% to 14%. We're expecting an adjusted operating margin of 11% to 16%, assuming A fuel price of $2.85 per gallon. The fundamentals of our unique diversified business remains strong and our model is Thank

Speaker 3

you. And our

Operator

first question comes from the line of Duane Pfennigwerth with Evercore ISI.

Speaker 3

Hey, good morning. Thank you. Just on the cadence of capacity growth recovery for the balance of the year. And I guess that's mainly a scheduled service question, but maybe you could talk about it On a block hours basis across your segments and maybe specifically for The scheduled service business as well, are you getting kind of the acceleration at the rate that you had previously hoped?

Speaker 2

Yes. We're seeing we are definitely seeing acceleration. So growth in the Q2 versus the Q2 of 22 will be higher than 1st quarter growth. 3rd quarter should be a substantial growth quarter. We're expecting strong summer, and we're gearing up to grow pretty substantially.

Speaker 2

4th quarter growth will taper a little bit, not for any capacity constraint Just because of demand patterns. But we're seeing The increase in capacity that we had planned for 2023, We're not growing as fast as we would like or really as fast as the opportunity presents itself, but growth will be substantial, particularly in Q3 And more so to come in Q2 as well. Just a few more comments. Let airlines have philosophies about Overscheduling and then cutting down when they have a lot of daily frequencies or under scheduling and then adding in this case for us where we see certainty developing in our staffing. So we if you look forward in our selling schedules through the end of the year, we load Smaller schedule that we hope to be able to operate.

Speaker 2

Additionally, at Sun Country, we have a lot of close in charter sales And charters continue to grow as well with about the same pace as what we're seeing in our Sched Service business.

Speaker 3

Okay, great. And then just with respect to variability of your scheduling, just by the nature Of the model, you kind of have to make a bet on seasonality and you're shaping your schedule pretty aggressively. Any surprises in seasonal demand patterns? In other words, are the off peaks as off peaky as you're scheduling to? Or maybe what do you make of comments from some of the industry competitors that the off peaks are kind of worse?

Speaker 2

Thanks, Duane. Yes, I mean, from my perspective, the surprise is that it's kind of like it was before COVID, where we had an incredibly strong Spring break travel season that begins for us in mid February and goes through Easter, and it was It is good as anything we've seen. And then the last half of January and the first half of February were As weak as they had been in the past also. Now what I'd say, because there's been a lot of discussion about bleisure And let me just define that term as I would think about it. It's not people going on a business trip that then tack on a couple of days Of leisure, it's people that can work from anywhere and therefore, can travel a little more frequently or go to So what I've seen in our network is a really substantial increase in secondary destinations.

Speaker 2

Leisure, As I kind of grew up in the space, it was always about Orlando and Vegas and now it's really diverse with Particular expansions in smaller markets like the Northern Rockies and Tucson and Hilton Head, Savannah and Charleston and Asheville and Destin, our small international destinations like Grand Cayman and Aruba, Belize. And so all those markets have really outperformed and that's what I would attribute to because I think what you're asking is kind of The post COVID leisure environment, but the peak still remain and that kind of I think tees up pretty well for our business model.

Speaker 3

Okay. Appreciate the thoughts.

Operator

Yes. Thank you. And our next question comes from the line of Ravi Shanker with Morgan Stanley.

Speaker 4

Thank you. Good morning, gentlemen. Maybe just continuing on that line of conversation, but looking far out, I mean, you said that your booking curve extends out to almost December right now. So What does the forward curve look like? Any signs of cracks in demand, particularly kind of maybe post Labor Day and that post summer travel surge?

Speaker 2

It's really hey, Robbie, it's Jude. It's just too early to comment on post Labor Day. I mean, we wouldn't sell that. Historically, that time of year anyway sales close in and there's no difference really. Broadly across the network, we're selling well ahead Of 2019 levels, so in other words, the percentage of our seats that are sold as we sit here today looking forward into the advances is higher than we were in the same time in 2019 and fares are substantially higher than they were that period and they remain higher than We're in the summer peak of last year, which was a pretty strong demand environment.

Speaker 2

We're growing again really rapidly into that Peak period. But I'd say broadly strength everywhere. I'd call out Areas of strength international continues to remain strong. That's been sort of echoed by other airlines on their earnings calls. We turn our international network to originate out of the South in the summertime and that's doing really well.

Speaker 2

The PAC Northwest is looking really, really good, with the resurgence of like Alaskan travel, I think that plays into the leisure Thesis, last summer was really about big city destinations from Minneapolis for us and that's coming back really nicely. We're trying a lot of new things on the network and probably I'd like to see, I don't know, 20% of them Fail, which is to say that we're trying things that might not work and we have other better opportunities. So I think that won't be any different from years past where we cycle capacity into 2024 that we tried this year that didn't work out. It looks really, really good. Honestly, there's nothing I look to try to find weakness and it's difficult right now.

Speaker 4

That's a great comment. I might steal that from you. Maybe also a good starting point for a follow-up question, which is A little more of a theoretical question. I mean, just given your unique network and the reasons why in a passenger, Flyer Airline kind of given the MSP connectivity to the rest of the country and the world, just how macro sensitive Or demand elastic or inelastic are your passengers do you think?

Speaker 2

Well, they're elastic for price, that's for sure. But that's no different from other leisure customers. If what you're really asking is kind of how sensitive the Minnesota leisure customer is to the macro environment, Then I would rather be in Minnesota anywhere if there was going to be a disruption because the economy is incredibly stable here and that's been proved out Many cycles of the past with really high affluency, high propensity for travel And very stable economy that has industry dependencies that are food and healthcare and the like. And we kind of demonstrated that through COVID a little bit where we outperformed the industry pretty dramatically Even on our Sched service business. But I don't think the key should be attributed to solely to the Minneapolis market, really the secret sauce Being able to cut an ag capacity without much change to your unit cost so that we can always find these opportunities of positive margin

Speaker 4

Very helpful. Thank you, sir.

Speaker 2

Yes.

Operator

Thank you. And our next question comes from the line of Catherine O'Brien with Goldman Sachs.

Speaker 5

Hey, good morning everyone. Thanks for the time.

Speaker 2

Hey Catherine. Hey Catherine.

Speaker 5

So I apologize in advance, it's like a multipart cost one for my first one.

Speaker 6

Can you just give us

Speaker 5

some more color on the cost outlook underlying your 2nd quarter margin guidance? I think on my math it implies Some slowing in the growth year over year, but a step up in growth on both the CASM ex and cost ex fuel per block hour basis. Was there something about the 2Q 2019 comp that we should be remembering or was there lumpiness and timing this year. I guess just I'm just trying to get a better sense of like how we should think about the second half. And then Among your peers, your business model has changed the most since 2019, right?

Speaker 5

And then we layer on kind of industry wage inflation and other inflation on top of that. So like trying to get a sense of kind of maybe anything we should be thinking around the comps or lumpiness this year, but really ultimately like what's the goal On either a CASM ex or a cost per block hour basis when you get back to that targeted utilization. I appreciate you letting me ramble on a bit here. Thanks.

Speaker 2

Yes. So I would think of it this way. First of all, if you're looking back 2019, obviously, a lot has happened. Like you said, we've added a whole new line of business. We signed a new pilot agreement.

Speaker 2

We've had Other wage pressures that everyone else has had. I think the story on the CASM ex front is a pretty straightforward one for us. I mentioned during our during the prepared remarks that our aircraft utilization has dropped fairly dramatically. The number of average aircraft in our fleet is up substantially. The number of pilot bodies is up substantially.

Speaker 2

Essentially, I would think of us right now as a little bit oversized for how much flying we're doing. So We've been steadily hiring. We've been steadily adding aircraft. There's an opportunity for us as we add Really pilot production capabilities here and we're making a lot of progress on that front to sort of grow into the size that we are now sized for. The results should be high marginal profitability going forward, not a need to add a substantial number of aircraft, Nor substantial number of pilots in the near term.

Speaker 2

That's really the underlying story on the CASM ex front for us. What we should see, what our plan is, is if you look at sort of on a quarter by quarter basis that year over year pressure should ease a bit next quarter And then begin to ease substantially in the back half of the year as the strong third quarter growth kicks in. I'm a little hesitant to give sort of a long run CASM number at this point, but suffice it to say We expect the number to be trending down as we go forward.

Speaker 5

Got it. Thanks so much for all that color. Super helpful. I guess maybe just on the ad hoc charter flying, when do you think you'll have enough slack in the system Pursue that more aggressively, not to say that having all that contractual long term charter locked in is a bad thing by any means, but just trying to get a sense of like When you think you'll have the slack?

Speaker 2

So first, that there is ad hoc or not Ad hoc is mostly about the certainty of our staffing, less about absolute staffing. So when we're going into a peak month And there's some we're dependent on some assumptions around attrition or hiring or any Or training or something like that, then we're going to schedule to the low end of where we think we might end up And then we'll fill that gap with ad hoc. So you're still going to see ad hoc flying grow through the year, but Kind of what we really want to get to is where we're scheduling to the capability of the fleet and then filling off peak with additional ad hoc opportunities as they become available and we're a ways off from that. But I would like to have Grant comment a little bit around our Revenue.

Operator

Yes. Thanks,

Speaker 7

Jude. It's exactly right. The team does a really good job of sort of looking out into the future, Placing our bets in terms of where we expect the most value and optimizing revenue and ad hoc As we've talked about, it's been the thing that's sort of been spilled off lately. I will tell you right now, we're more aggressive in the market in April, May and June in that space. So I think it's sort of meeting plan and expectations and it will be a developing story.

Speaker 7

Our charter reputation is Really, really good. So as we get back into that, customers are very willing to talk to us and ready to talk to us because we have a proven track record.

Speaker 5

Thank you. I might just try to squeeze one more in. Just coming back to something you mentioned, Dave, answering the cost question, you noted that you're A little bit maybe overstaffed and overfleeted for what you're growing today. Is unlocking the utilization, is that About getting captains upgraded or what really is like the barrier to kind of getting that utilization and Back up and running if it's not necessarily pilot bodies to steal your phrase.

Speaker 2

Yes, it's continuing to make progress on our training pipeline. Like I said before, we got we have a lot more pilots on board from a number of perspective and we're moving them quickly through the training pipeline. Just a quick statistic. So If I look at January through April of 2023 compared to January of April of 2022, We're producing about 33% more pilots than we did year over year. So we're making slow, steady progress on pilot production here We expect that production to those increases to continue through the year.

Speaker 2

But that continues to be sort of a gating item for us and We're making a lot of progress on it. I also do want to just reiterate though this issue that I've tried to mention on the call. It's not all about utilization here. It's making sure we have shell count available when the demand is there because peak time, Day of week, TRASMs, average fares are so high, we need to make sure we have all the aircraft we need to pick up that demand, And if we have to suffer a little bit on overall utilization because the aircraft are parked during off peak times, So be it, because the overall profitability trade off is there and I think it reflects itself in the Q1 profitability numbers that we put

Speaker 3

up. Got

Speaker 5

it. Thank you very much.

Operator

Thank you. And our next question comes from the line of Helane Becker with Cowen.

Speaker 8

Thanks. It's Elaine Becker. And it's TD Cowen. But thanks very much guys for the time. Quick question.

Speaker 8

Hey, Elaine. I kind of Why is your air traffic liability down 4th quarter to 1st? I feel like it should have gone up. What I Obviously, I missed something here.

Speaker 2

Well, remember, we're burning we're doing a whole bunch of flying in the first a bunch of tickets are purchased in the Q4. We're doing a whole bunch of flying in the Q1 that the people purchase tickets for in the Q4. It's all about days out. Yes. So our winter capacity is sold earlier than our summer capacity and that's historically been consistent.

Speaker 8

Right. So that's and that's all the close in bookings that you tend to get, right? People tend to book Closer on your airline than on the PR group?

Speaker 2

No, no, no. It's really comparing us to ourselves. So our summer schedule books closer in because it's shorter haul, just the kind of markets that we serve. But if you think about the kind of that Minnesotans take in March. It's planned months months in advance, fairly high fare environment.

Speaker 2

People These are just very important trips to people, so they plan it really in advance. So when you look at our end of December ATLs, It's reflective of those Q1 bookings as compared to if you look at the end of March, our ADLs are reflective of bookings going into this summer, which will be later.

Speaker 8

Okay. Thank you. I appreciate that. And then my other question has to do with the comment about the price hike every December on the Cargo Business. Does that fluctuate year to year or is it a fixed amount?

Speaker 2

Yes. So we don't want to get into yes, we probably don't want to get into too many details, but suffice it to say there's various line items in our agreement that And that change at different numbers, but it's contractually laid out.

Speaker 8

Okay. All right. That's really helpful. I have other questions, but I'll follow-up later. Thank you.

Speaker 2

Thanks, Elaine. Good morning.

Operator

And our next question comes from the line of Mike Linenberg with Deutsche Bank.

Speaker 6

Hey, good morning guys. I want to just go back to hey, Jade, you had mentioned about Certainty of staffing and how that had been maybe a potential gating issue. What are the pain points there and where are we And not just pilots, I'm looking mechanics, flight attendants, ground people, any issues that you're running into attrition rates, etcetera.

Speaker 2

Well, the technician staff is tight, but it's okay. And generally we're able to respond to all the rest of our staffing to how Things are going on the pilot side. So the dependency remains with our pilots. And as Dave outlined, the challenge is really about the training pipeline now. So we don't have a problem with attrition nor with hiring.

Speaker 2

It's really about trying to get people through the training pipeline, through the simulator, Through the upgrade process, get the instructors And to their jobs and build the whole infrastructure out. It's just taking some time. I think one of the things One of the things, Mike, just quickly to note on that is, if you recall a year or so ago, maybe a year and a half ago, we saw a lot of difficulty in airport staffing.

Speaker 6

That's

Speaker 2

eased tremendously. I mean that constraint is gone. There's no constraint on the flight attendant side. We're staffed where we want to be on Mechanics side, so as Jude pointed out, it's a little tight. It's hard to get some of those guys, but that's not an issue.

Speaker 2

Those groups are not gating items.

Speaker 6

Do you with the pilots and the training, do you have a sense that the light at the end of the tunnel is 2023? Or does this continue Beyond that, I mean, is this going to be a multi year that you're just going to always be playing catch up?

Speaker 2

Well, with these margins, We'll add aircraft so that we're always constrained.

Speaker 6

Okay.

Speaker 2

Yes. I mean, we have Substantial growth plans in the next few years in our long range plan, we're going to be constantly adding training capacity and adding production capacity. So it's kind of not a caught up point for us. We're thinking right now how are we gearing up for Q1 of 'twenty four. We're going to need staff for that and then into the summer of 'twenty four.

Speaker 2

So it's kind of a never ending thing. I think about it like long range. We want to be in kind of the mid teen range of consistent growth, Maybe a little bit more some years, a little bit less other years, but we want to be able to accomplish that.

Speaker 6

When you mid teen, Jude, is that ASMs or that's block hours?

Speaker 2

Block hours for us is what counts just because that's the unit of measure across our segments.

Speaker 6

Yes.

Speaker 2

So and we're going to start hitting that towards the back of this year. So we're kind of to the production levels that we would like to be and it's going to get As the airline grows, we're going to need to produce more pilots every month to kind of keep that rate going. So I think pilots are going to be the story for a while.

Speaker 6

Okay. Just jumping to the new airplanes, the 730seven-nine 100 ERs. What's the seat count versus the 800? And What's the difference in the departure cost? Probably pretty similar.

Speaker 2

Yes. So we have 186 seats On our 800s and our expectation is still being studied a little bit is that we go to 200 on the 900. The 900s Have almost the same departure costs. There's a little bit more fuel, little bit higher landing fees, same crew complement. So it's nearly identical departure costs and so those incremental 14 seats are just very, very profitable as you'd imagine.

Speaker 2

Yes. That's a great airplane for us. And I was going to

Speaker 6

say that plane has the legs to make Hawaii without penalty off the West Coast?

Speaker 2

Yes. It's a little bit longer range actually than the 800, the 900 ERs, about 150 nautical longer. So we can do everything we do with the 800 And then some. There's no real markets though that we would open up because of that small incremental range. Yes, we can do just about anything.

Speaker 2

It's got a little bit of field performance. So there are some challenging airfields that we fly in and out of with the 800 that the 900 Can't go into, but it's a good it effectively does everything we want to do with it with the 800 on the 9th quarter.

Speaker 6

Okay. Great. And if I could just sneak in one last one. It is interesting about your scheduling versus your peers where There is a schedule out there and we constantly see sort of the reduction of revisions with a downward bias. And You're right.

Speaker 6

It's interesting your schedules. You seem to be the only carrier where you put a schedule out there and then as you get closer in, you're adding frequency at the last minute. What and I'm just thinking over the last couple of quarters, what has been that upward bias? Is it about a half Point of ASM growth in the scheduled business. I just haven't actually done the math, but I have noticed it.

Speaker 6

I'm just curious, It does seem like there's that upward bias and it helps obviously on the cost side as well as the revenue side.

Speaker 2

I mean, 2% to 3%, I would guess. And just keep in mind, there's a lot going on there. So One thing is we don't oversell currently any flights and we have low frequency into markets. So when we put a flight for sale, we need to commit to that flight because there's not a lot of Rheocom opportunities for our passengers. And the airlines that are adding a lot tend to cut down multiple daily Yes.

Speaker 2

So there's Viacom embedded in their network for those passengers we still have at Luxury. So We bias towards late adds as opposed to late cuts.

Speaker 7

Mike, I would just this is Grant. I would just add that and you've You heard us talk about this quite a bit at conferences and the like. The schedule integration topic, a shout out to the team here. We have Really capable schedulers. And so as we put out the charter schedule and the charter schedule adjusts, The team goes in and strategically adds flying.

Speaker 7

Great example, big partner of ours, here's the University of Minnesota. They

Speaker 2

went to

Speaker 7

the Frozen 4 Hockey tournament. We chartered them down there and then we found ways to be With that schedule, we opened up capacity close in for fans and at really Good prices relative to the market, still really good yields, filled up all the airplanes and it was just a win win for everyone.

Speaker 2

So if you're looking at our schedule, there's a lot of really weird frequencies in there that you might be like, why are they flying newer twice a month in March? And that's because we're flying the Red Bulls.

Speaker 6

Yes.

Speaker 2

So we make a decision when we sell that charter, is it better to ferry in or is it better Just sell it, SCED, and it may we may only have a month to try to fill the airplane, but it's still better. So that calculus is happening all the time and that leads to, as Grant mentioned, a lot of other late adds in the Sched service business.

Speaker 6

Yes. I was just going to say notwithstanding the few days in many, you just you guys don't cancel flights. I mean, as far as I can go back, You don't cancel. It's impressive. I don't think there's anybody who has a record equal to yours at present.

Speaker 2

Well, thank you. I mean, We got a great team here. I think it's the number one operating metric that we strive for. And this winter was a tough one for us, but and some people had to call a lot later, but yes, but we do everything we can not to bring a flight down.

Speaker 6

Great. Well, very good. Thanks for answering my questions.

Speaker 2

Thanks, Mike. Good to talk to you.

Operator

Thank you. And our next question comes from the line of Christopher Stathoulopoulos with Susquehanna.

Speaker 9

Good morning, everyone. Thanks for taking my questions. So Two questions. On Amazon, with Amazon looking to improve the, Yes. I guess network delivery efficiencies, if you could just comment how we should think about the puts and takes And then a little bit more nuance here, just remind us whether there are minimum block hours with this service.

Speaker 9

And then 2, How much in advance do you get the flight schedule? So meaning, do you know what you're flying for Amazon in the second half of this year or peak season at this point? Thank you.

Speaker 2

Yes, I mean, so Amazon's obviously been striving to Improve overnight delivery is for as long as we've been involved. We have seen kind of no changes or minimal changes in there In the scheduling, we haven't seen any significant reductions in block hours or if anything, it's been a little bit of pressure in the other way. So it's been sort of Steady Eddie from a scheduling perspective from Amazon. So without going too much into the details of our agreement, Not really minimum block hours, but the contract is constructed such that there's A fixed component and a variable component. So you could kind of say that the fixed component is a minimum block hour number, but It's just a fixed number that we get.

Speaker 2

So it's structured that way. From a schedule perspective, we're working on schedules right now through the back of the year. Here's how I think about Amazon. It is a fixed input into the capacity plan. It's almost Precisely Reliable.

Speaker 2

We're doing about 38 dailies today. I expect to do about 38 dailies at the end of the year, this time next year, etcetera. What changes though is the markets we fly to and that's what Sun Country is really, really good at. We're always opening and closing airports for That's why they hired us. We're really, really flexible.

Speaker 9

Okay. Second question, if you could comment on what you're seeing with respect to used aircraft prices today and perhaps your thoughts on the market going forward. Thank you.

Speaker 2

Well, I mean, fortunately, we don't need to buy a lot right now because prices are a little tighter. There's I'm trying to think of something I can add to the already very common discussion about the delays in the MAX The effect that that's having on the NG market, we have the capacity with this 900 deal kind of laid out for the next couple of years. We remain in the spot market and when planes pop up to fit our spec and they're at good prices, we'll still be buying from time to time, but we're talking really small quantities. And that and then this is still growing 15%, whatever, 20%, whatever we get to going into next year. Here's one more comment on the NG prices.

Speaker 2

So there's when we think about a used NG, we kind of attribute value to The maintenance value that we transfer from the prior operator, then the piece parts That we're going to sell when we retire the airplane and then finally the difference is an operator premium. And that operator premium has been around 0. So no premium and now it's like $1,000,000 or so. And so it just doesn't really move the needle. The midlife NG is still an incredible investment for us.

Speaker 2

And we'll be looking for 900 ERs and 800s that are in the 8 to 12 year range, I think probably for the next 5, 10 years. Yes. I mean, one of the reasons that we're a little oversized from an aircraft perspective is because we're opportunistically buying and going to grow into it. So when the deals are there with the economics we want, we buy the aircraft. Ownership costs for these planes is pretty low.

Speaker 2

So we're going to continue to buy aircraft when we see great deals and we'll grow into it. Financing cost spreads have base rates moved up obviously higher than where they were last year. But we have the balance sheet to continue to execute the fleet plan irrespective of financing.

Speaker 9

Okay. And if I could give you one more, the recent deal, the 730 7,900 deal with Almonair. So is that that looks at least until you take, I guess possession of these is it late 2024 to 2025? And in the meanwhile, should we think about that as sort of like a dry lease and You know dry leasing perhaps something that you could look to move into opportunistically or kind of more On a sort of go forward basis. Thank you.

Speaker 2

I mean, think of us for the We're a lessor. We leased the aircraft to Oman. We stepped into somebody else's shoes. That's the extent of The relationship, so we're collecting lease income. We own the aircraft.

Speaker 2

It's standard lessor or lessee relationship for the duration of these leases. I don't see us really be getting very active in the dry leasing world. I mean, Back again sort of to what I was saying on utilization earlier, there's plenty of opportunity to fly all of these aircraft at peak So we can't really have them dry lease to somebody else because we want them when we need them, even if they're going to sit around a little bit more than would be optimal. Acquiring an airplane with a lease attached, I think that makes sense. Taking an airplane that we own and leasing it out and remarketing leased airplanes, That's not really a core competency that we want to focus on.

Speaker 9

Got it. Okay. Thank you.

Speaker 2

Thanks, Chris.

Operator

Thank you. And our next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Speaker 3

Hey, thanks for the follow-up. That was actually the question I was going to ask was on fleet, but maybe you could just put a finer point on When those aircraft come into revenue service for you, in other words, how long will you be collecting that lease revenue? And How many aircraft do you need to go out and acquire to support 2024 growth? And thanks for taking the questions.

Speaker 2

Yes. So the aircraft, think of it this way. The aircraft come off of lease beginning in, I think it's November of 'twenty four and extend through like November of 'twenty five. So then we need to take the aircraft, reconfigure them and so forth. So I would be thinking the first Oman aircraft come into service here probably Q2 of 2025 Kind of a thing and then sort of going out from there.

Speaker 2

So we have a we've done a couple of other aircraft deals in That will deliver mid this year that will go into service mid this year and Early 2024, we probably from an operational perspective right now Don't need additional aircraft, maybe 1, but we don't need additional aircraft going into the Q1 of 2024. So I think we're properly sized from a fleet perspective. As I mentioned earlier, if a great deal comes along, we'll probably do it, but we don't really need to do it right now.

Speaker 3

Okay. Thank you very much.

Speaker 2

Thanks, Dwayne. Thank you.

Operator

And I'm showing no further questions. So with that, I'll hand the call back over to CEO, Jude Bricker, for any closing remarks.

Speaker 2

Thanks for joining us this morning, everybody. We'll talk to you again in 90 days. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Sun Country Airlines Q1 2023
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