Sun Country Airlines Holdings, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Business Model: Diversified model provides flexibility and industry-leading profitability, leveraging charter and cargo predictability for scheduled service flexibility.
• Contract Ratification: Flight attendants and dispatchers ratified new contracts, with raises and strong service delivery.
• March Operations: Controllable completion factor in scheduled at 99.4%, over 98% on time in cargo, and a 1.3 mishandled bag rate (record).
• Quarterly Results: First quarter 2025 was the strongest quarter with quarterly records for revenue and earnings, outperforming mainline carriers.
• Cargo Expansion: 3 of 8 additional cargo aircraft inducted, planning 8 aircraft in service by summer; unit revenue per block hour up 20% YOY, projecting cargo revenue to double by September.
• Scheduled Service: Scheduled service ASMs to shrink 7% in Q2, with TRASM expected to improve 3%; charter revenue set a record in Q1, expected to perform well rest of year.
• Fleet Updates: Redelivered first 900 for passenger service, deferring second, and retiring an older 800.
• Financials: High free cash yield, net debt expected to fall below 0 in 2028, and $25 million share repurchase authority granted.
• Awards and Ownership: Awarded Air Transport World's Airline Leader of the Year for 2025, with Apollo's ownership sell-down completed.

Segment Performance

• Passenger Segment (Scheduled Service and Charter): Revenue grew 4.1% year-over-year to $326.6 million. Scheduled service TRASM declined 4.7% with a 6.7% increase in ASMs. Charter revenue grew 15.6% to $55 million on a 10.7% growth in charter block hours.
• Cargo Segment: Revenue grew 17.6% in Q1 to $28.2 million, despite a 1.1% decline in cargo block hours. Q1 cargo revenue per block hour was up 18.9%, driven by rate changes in the Amazon agreement and annual rate adjustments.

Guidance

• Q2 Expectations: Total revenue expected $250 million to $260 million, with block hours down 1% to 3%, fuel cost per gallon $2.44, and operating margin 4% to 7%.
• Scheduled Service: Scheduled service ASMs to decrease ~7% in Q2 as pilot resources are allocated to cargo growth.
• Cargo Projection: Cargo revenue projected to double by September, with 8 cargo aircraft in service by summer.

Risks

• Cargo Induction Variability: Induction timing of cargo aircraft is variable due to part dependencies and transition issues from prior operators.
• Cost Pressures: Pilot resource reallocation from scheduled service to cargo may cause temporary cost pressures.
• Industry Volatility: Industry conditions and fare volatility could impact profitability.

Question and Answer

• **Q: Can you talk a little bit about the ramp of aircraft and utilization and frankly, profitability or margins on the cargo side? How has maybe the change of that slope or how is the slope of that kind of changed versus your expectations at maybe the outset of the year?

A: Duane, the right way to think about it is we're going to grow pilot credit hours by 10% a year. The flying that we do in cargo uses more credit hours to produce a block hour. So even though we're growing credit hours by 10%, total system block hour growth will be below that as we expand in the cargo. And then once we've absorbed the cargo growth, we'll be adding back really efficient flying into scheduled service and so growth will exceed that 10% level. So this will be about a 3-year process to go into all the aircraft that we've already committed to, both from the lease-out fleet and the cargo expansion. More near term, we're taking on these 8 airplanes and there's a lot of variability in the induction timing because we have part dependencies, sometimes record inconsistencies during the transition from prior operator, all the things you face with the induction of a used airplane. And so we staff up in expectation of that. What's expensive today that we're experiencing is that we staff up for an airplane that may come in late but we can't really backfill that with other opportunities on the passenger side because we need 120 days at least to schedule a flight and we need a little bit of warning and demand dependent to get it into the ad hoc charter market. So we'll have a little bit of headwinds on cost but this is a 10% growth airline and probably will be for the next 3 years. The airplanes that are going to support that are already either on the balance sheet or committed through contract and don't require any CapEx. So we're just here executing.

• **Q: Jude, I want to go back to just sort of what you saw with respect to demand through the quarter and as you head into April. You only called out February as being off-peak and it sounded like it was a bit challenging on the demand side. A fellow low-cost carrier yesterday talked about a real tough March and a really not a great Easter either, not a great April. It sounds like that you didn't see that. You talked about acceleration of close-in and maybe on the pricing side. Can you just elaborate on the March?

A: Yes. Mike, well, here's what we're seeing. We had just to start off with, we reported 18% margin. So things are pretty good. I want to call that out. So but relative to where we thought we would be, we're below. And what had happened was January was really strong. All the airlines probably saw the same thing. So we held fares high in the booking path going into February and March and we missed on load factor because as things slightly weakened, we weren't able to catch up. April will be up by about 5% probably I'm talking unit revenues, I'd say 3% to 4% in May and probably 2% to 3% in June. But what's happened more recently is that these close-in fares have really accelerated rapidly. Keep in mind, our winter network and summer network are totally different. So we're talking about leisure market demand when we speak winter, so Florida, Mexican Caribbean, Southern California, Southwest destinations like Vegas and Phoenix. And then when we move into the summer, it's Minneapolis connecting to big cities plus Texas origination in Mexican Caribbean market. So when we talk about Minneapolis big city markets which is a big thing for us in the summer, those fares have accelerated really dramatically in the last couple of weeks and the capacity looks really promising, both because we're drawing down and the O'Hare backdrop is rationalizing really rapidly. So we're guiding conservatively. I'm certainly seeing more positivity in bookings than what we're baking into our forecast.

• **Q: Thomas Fitzgerald with TD Cowen asks about the new credit card deal with Synchrony. Could you talk about the new credit card deal with Synchrony? It seems like it could be pretty exciting for your model but I'd just love to hear how investors should think about how incremental it could be to growth and remuneration?

A: Yes, we're excited about it. So the background was we inherited a credit card agreement, these typically are about 7-year deals. So this is kind of our first opportunity since I've been at Sun Country to really leverage our relationship with our co-brand partner. Synchrony is going to become our co-brand. We'll implement the program in the third quarter. There's going to be some headwinds in the meantime because the credit card transition limits our ability to build the credit card issuer base during this period. But the most substantial benefit is just an increase in rates for us. We're going to load a lot more technology to make it a better program for our consumers but our revenue share is going to improve fairly dramatically. So yes, this is going to be a really positive development for us but it's not going to really hit the P&L until '26 and beyond.

• **Q: Catherine O'Brien with Goldman Sachs asks about the cargo revenue ramp this year index. You've taken delivery of 3 of the 8 incremental aircraft year-to-date by, I think, 1Q end but only 2 of those were flying and really late in the quarter. Jude, you said you expect to see a doubling of revenue by September. So, should that inflection really be more back-half weighted? And then if I take you literally, that 4Q could be double year-over-year, that's about $60 million and then you get that December rate step up. So next year, should we be thinking about something in like the mid-$200 million range?

A: Yes. I mean, the rate increase of 20% per revenue block hour and then the block hour production of 8 incremental airplanes, the math works out to about 100% increase by September. Those airplanes are coming in just as rapidly as we can put them in there but there's a process of putting it on the certificate, getting the transition mods completed and then getting them scheduled and we're running behind for reasons beyond our control. So, it's going to be a little lumpy as we move through the transition but I expect September to be operating 20 airplanes and unit revenues September year-on-year should be about double and that should roughly hold through until we lap ourselves on that metric. I don't think though, it's $250 million. I think double would be more like $200 million, yes, $220 million, something like that.