Earnings Labs

Sun Country Airlines Holdings, Inc. (SNCY)

Q2 2022 Earnings Call· Fri, Aug 12, 2022

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Transcript

Operator

Operator

Welcome to the Sun Country Airlines Second Quarter 2022 Earnings Call. My name is Kathy Darnell, and I'll be operator for today's call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I'll now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Chris Allen

Management

Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President and Chief Financial Officer; and a group of others to help answer questions. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements, which are based upon management's current beliefs, expectations, and assumptions, and are subject to risk and uncertainties. Actual results may different materially. 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 to update any forward-looking statement. You can find our second quarter press release on the investor relations portion of the website at ir.suncountry.com. With that said, I'd like to turn the call over the Jude.

Jude Bricker

Management

Thanks, Chris. Good morning, everyone. Demand for all segments of our business remains as strong as it's ever been. Our revenue in 2Q grew over 29% versus the same quarter in 2019 on block hour growth at 23%. During the pandemic, we launched and built out our cargo business and now, and over the next several quarters, our main focus at Sun Country is to staff our airline to get back to 2019 utilization levels on our passenger fleet, as quickly as possible. We want to deliver this growth, while also maintaining the operational excellence and service levels that our customers expect of us. I'm especially proud that year to date, Sun Country has led the industry in completion factor with 98.2% in this challenging operational environment. That performance during such rapid growth is a testament to the hard work and talents of all our team members that deliver for our customers each day. Like all airlines, we're facing the challenges of record-high fuel, tight labor market, and inflationary pressures. We built a model that we believe can deliver profits in any environment. We were profitable through the pandemic, through a war, and now through record fuel. Our flexible network, combined with having a large percentage of our flying committed to long-term pass-through contracts, give us the ability to be successful regardless of what challenges we're facing. By design, our response to high fuel is to cut off-peak flying and concentrate our schedule on periods of the calendar when we're able to achieve acceptable returns. As fuel rose rapidly through February and into May, we aggressively cut weaker periods like mid-week, May and September and long-haul routes that are more fuel intensive. These capacity cuts, along with all our revenue initiatives, allowed us to deliver over 29% schedule service TRASM…

Dave Davis

Management

Thanks Jude. Before I get into a discussion of our results, recall that Q2 is a seasonally weaker quarter for Sun Country than Q1. This is unlike many of our competitors whose business strengthens during Q2. Sun Country posted an adjusted operating profit of $4 million for the quarter and an adjusted EPS loss of negative $0.03 per share. Adjusted operating margin was 1.8%. Our results were driven by a combination of unprecedented growth in unit revenue, historically high fuel prices, and under-capacity driven by staffing issues. I'll delve into each one of these items in my remarks. First, revenue and capacity. Second quarter revenue totaled $219.1 million, a 29% increase versus Q2 of 2019. Demand continues to be robust. Scheduled service revenue was $152.6 million, a 22.5% increase over Q2 2019, and scheduled service TRASM grew 29% versus 2019. For the month of June, scheduled service TRASM was 44% higher than 2019 and July finished over 40% higher than July 2019. So, recent positive revenue trends are continuing and are evident in our forward bookings. Our average fare of $173 was 22% higher than Q2 of 2019. System block hour growth for the quarter was 23% higher than Q2 of 2019, driven by the growth of our cargo segment. System ASMs declined by 6%, compared to Q2 2019, which was considerably smaller than we would've optimally been, even at $4 plus fuel prices. As Jude mentioned, since finalizing our pilot agreement in December of last year, we’ve been able to attract all of the pilots we need to meet our staffing requirements. In addition, attrition has continued to moderate since Q4 of last year. As we implement the new agreement, we've been increasing the size of our hiring and training pipeline to accommodate our growth plans. This work is…

Operator

Operator

Thank you. Our first call comes from the line of Duane Pfennigwerth with Evercore. Go ahead, your line is open.

Duane Pfennigwerth

Management

Hey, thanks. Good morning. You gave some of the stats on training, but maybe you can just kind of re-summarize that. Can you speak to how your throughput is changing? How did the number of flight instructors change? I think you were looking for a step-up there in the month of July. And just to maybe bottom line it, when do you think you're going to be fully back or where you want to be on staffing, maybe with an eye toward the fourth quarter?

Dave Davis

Management

Yeah, so just a couple more stats. I talked about, sort of the pretty dramatic increase in our pilot output. There's been a couple of bottlenecks in the training pipeline. One of the biggest ones, which we've now largely overcome, is on basically check airmen, IOE pilots who can certify our pilots to fly before they get online. We had only five IOE instructors in the months, kind of, leading up to July 1, when we increased that number to 19. We’ll continue to increase that number in the months ahead, so that bottleneck we think is largely cleared. There's a couple other things we're sort of working through here as we go forward, which I think we're going to have solved, I would say, in the next quarter to two quarters. We'll know a lot more in the next several months, but all of our trends are very favorable. If you look at our growth, as we look out later into the year, we'll be accelerating again relative to the fourth quarter. So, we've just been going through implementing the new pilot agreement. The good news is, sort of some of the uncontrollable factors, like attrition and new hires, we have a solid handle on, so we can attract all the pilots we need and our classes are as big as we want them to be.

Duane Pfennigwerth

Management

Okay, great. And then just for a follow-up on network, obviously, right here and now you're constrained, but can you give some color on the types of markets that maybe outperformed in 2Q versus the markets that underperformed, with the benefit of hindsight?

Jude Bricker

Management

Sure, Duane. So, the most disappointing under-capacity allocations were markets that were in, kind of an in-elastic state where they were large enough markets to handle a lot more capacity, showed significant revenue improvements. And we believe that adding more capacity wouldn't have changed the revenue environment much. And most of those markets were Minneapolis to large cities like Denver, Dallas, Baltimore, Boston, New York, Portland, Seattle and Houston, Indianapolis. So, those markets, I think we’re – we don't know for sure, but were lifted by a return of business demand, which lifted overall fares. And we think that there was a lot of opportunity to add significant capacity. Instead, we were allocated more into fixed fee, as we talked about, but also a lot of leisure markets that didn't see the, kind of revenue improvement that we saw in these larger markets. Grant, anything to add?

Grant Whitney

Management

No, I'll just – well, I would add one thing. It's just, we've grown Minneapolis non-stop destinations by over 50% through COVID. And as Jude mentioned, some markets performed better than others, but I would say broadly, Minneapolis performed very, very well. The new markets did meet expectations and we did see a lot of good growth opportunities that remain in the market. And we will be opportunistic, we will take advantage of it as the capacity becomes available.

Duane Pfennigwerth

Management

Okay, thank you.

Jude Bricker

Management

Thanks, Duane.

Operator

Operator

Thank you. Our next call comes from the line of Michael Linenberg of Deutsche Bank. Go ahead. Your line is open.

Michael Linenberg

Management

Great. Hey, good morning guys. Just following up on...

Jude Bricker

Management

Hey, Mike.

Michael Linenberg

Management

Hey, guys. Just following up on Duane's question. When I did see you pull down also some of the long, you know high volume summer markets, say West Coast, Hawaii, I just assumed that that was all because energy prices or fuel prices were above $4 a gallon, but it does sound like that you just – you didn't have the staffing. Was it a combination of both or would those markets have worked – some of those longer haul markets, would they have worked, given where overall fares are, where pricing is and the higher fuel was – was it mostly a staffing issue that drove that?

Jude Bricker

Management

It would have worked, absolutely. I mean, keep in mind, like, if you talk about Hawaii, we're talking about a market that would've started around Memorial Day, a little bit before, and, I mean, everything in June works on the schedule service side. So, we were making decisions, a combination of fuel intensity, so it's about 50 gallons per passenger to fly somebody to Hawaii versus 20 gallons or so on our domestic network. And then also crew efficiency because we're crew constrained, if there's any positioning or penalty, then we can get more flying done in a different way, then that goes into the calculus as well. Hawaii, we expect to be back next summer, it was – I would have done just fine in this environment, but we're just trying to put the best stuff in.

Michael Linenberg

Management

Okay. That's helpful. Then just – I know this got picked up and maybe it was from an interview and it was just maybe an off-the-cuff conversation about potentially flying wide-body airplanes. And when I sort of think about what you're dealing with right now, it doesn't seem like that that's anytime soon, but maybe it is. And it may be that in conversations that you're having with Amazon, if you were to do wide-body, I'm sure that there'd be a cargo complement as well. Otherwise, I don't think it would make sense. Anything that you can sort of just add to that? Maybe again, that was kind of off-the-cuff ? I want to put that to rest.

Jude Bricker

Management

Yeah. Sure. So, the question from the reporter was, noting that wide-body rates are in our pilot agreement, do we think it would work? And my response was, yeah, it'll work, but we don't have any plans to do it in the near future. So, multiple years from now, we might consider more than three years or so. And I agree with what your sentiment that there would be – need to be, kind of a cargo complement as well, to get the same synergies out of our multi-segment business in narrow-bodies into the wide-body spaces. So, we're not – our focus right now is putting pilots out onto the line and that'll be the focus for the next two quarters. Yeah.

Michael Linenberg

Management

Okay, great. And just squeezing one quick one on the pilot contract. Obviously, you're rolling out various elements. When does the – is the preferential bidding system, is that now up and running or does that take some time? Because I do think that that will also help, kind of work through – help you work things through. Is that – are you there yet on that part of the contract?

Jude Bricker

Management

Yeah. So, that's a good question, Mike. The answer is no. So, we have some of the stuff in place that maybe doesn't help from a productivity perspective. What we don't have in place is prep bid, which will help us. We don't have that in place yet. So, that's probably early in the year. We're working through with right now, very productively. We've got our vendor chosen and so forth. We just got to implement it and it's going to be early next year, but that's going to help, no doubt.

Michael Linenberg

Management

Okay, great. Great. Thanks for the time, everyone.

Operator

Operator

Thank you, Michael. Our next question comes from Barclays, from the line of Brandon Oglenski.

Brandon Oglenski

Management

Thanks for taking my questions. Jude or Dave, does this, you know the training problems you're having right now or the constriction here, does this change your longer-term capacity plans, especially as we think about 2023 or 2024 relative to where you were, maybe pre-pilot contract?

Jude Bricker

Management

Yeah, I mean, I think in the near term, we're certainly constrained by pilots. We expect, as we move into 2023, to be able – our goal, and we have line of sight on a plan, to achieve a 20% block hour growth rate, which I think is achievable over a more sustained period. We're not going to grow for growth purposes. I mean, we need to have high margin opportunities for that incremental flying, which I think exists in today's environment, even with fuel price, but in a recession or higher fuel, that growth rate would change. But we're building out training capacity, and also we have a contract and a value proposition to incoming pilots with diversity of our flying and growth rates that I think 20% is attainable.

Dave Davis

Management

Yeah. Let me just give you a couple – this is Dave, hey, Brandon. Let me just give you a couple other numbers though. So, we originally expected to end the year with 42-passenger aircraft. That's where we'll be. We are in advanced discussions, pretty close right now, on three more aircraft that'll deliver to us later in 2023, and we are remaining active in the market. The beauty of the fleet plan, as we talked about many times before, is we don't have fixed orders coming in. So, we can pivot, go up and down, based on, sort of how much we can fly and what the opportunities are? And we're going to continue to do that, just like we've been doing. But we're in the market, we're still looking for aircraft. We've got a strong beat on three more. So, we're moving forward and planning for sustained growth.

Brandon Oglenski

Management

And Dave, I guess, as you look out into 2023, if you're able to achieve that 20% growth in block hours, where would you see the CASM benefit come out?

Dave Davis

Management

You mean, like on what P&L line item or like what time period?

Brandon Oglenski

Management

No. I mean, I think the target was below 6 CASM, but now maybe a little bit around 6, where would you see longer-term CASM, I guess shaking out, to be more specific?

Dave Davis

Management

Well, CASM will be heading down as we grow. I mean, I don't have a revised plan right now to give you a number. I think our costs are well in hand. I just don't have enough done on the 2023 plan yet to give you a good 2023 number. The other thing to think about, this is always tough with us because we've got a big cargo business. So, we have costs that derive unassociated with ASMs. So, we really look at a lot of stuff on a cost per block hour basis, which we feel is pretty well in-hand, but I don't have a precise CASM forecast for you right now.

Brandon Oglenski

Management

Okay. Appreciate it, guys. Thank you.

Jude Bricker

Management

Thanks, Brandon.

Operator

Operator

Thank you. So, our next call comes from the line of Scott Group with Wolfe Research. Go ahead.

Scott Group

Management

Hey, thanks, good morning guys.

Jude Bricker

Management

Hey, Scott.

Scott Group

Management

So, I think you talked about 44% unit revenue growth in June, 40% or so in July, any thoughts on where we go from here and what you're seeing with fares as fuel prices are starting to come down?

Jude Bricker

Management

So, Scott, just want to make a clarifying point, which is that that's for scheduled service TRASM, which is about, I don't know, 60% of our – 70% of our block hours, 65% of our block hours, something like that. And the rest is in long-term fixed contracts, which adjusts slowly. And so, yeah, TRASM, I think your question is about long-term demand trends. We've seen really consistent year over three unit revenue improvements in sales for the entire selling schedule out through April. So, we don't see any slowdown associated with – any pullback in demand from where we were on peak levels in July. Our own capacity can influence that if we're able to add more. We don't want fares to get too high where travel is unattainable for a large portion of our customers, but there's no indication in any of our forward bookings of any weakness or any change from this summer .

Scott Group

Management

And so, at least for now you feel like you'll be able to sort of keep the drop in fuel and keep the benefit of that.

Jude Bricker

Management

Yes.

Scott Group

Management

And then you talked about, in the beginning, that you want to have industry-leading margins. Maybe just think about – that's, maybe the goal of double-digit margins, what has to happen – realistically, when can we get back to a double-digit operating margin?

Jude Bricker

Management

Yeah, I mean, so if you look back in the second quarter, the foregone opportunities of flying, it's hard to tell, but it's probably worth on the pre-tax basis and operating basis, in the tune around $15 million, which would've put us pretty close to double-digits. And I think – so then the answer to your question becomes how quickly we can put crews out onto the line to get the passenger fleet back to utilization levels that we have had in 2019. Now, the fuel price is higher, so the flying opportunities for high utilization are, sort of concentrated when fares are naturally higher. So May, there wasn't that much ; September, there won't be that many opportunities to add other than ad hoc charter opportunities. But for summer months, where this demand environment is so good, we're forgoing significant opportunities with utilization down 30%. And that's the key to delivering back to operating margins that lead the industry, I think.

Scott Group

Management

So, would that be your goal or expectation for 2023, to get back to leading the industry?

Jude Bricker

Management

Yes.

Scott Group

Management

Okay. All right. Thank you, guys.

Jude Bricker

Management

Just a couple other color, just because I myself. There's some – as you compare across the industry, so Frontier is taking sale leaseback, they take a gain from that. There are three carriers in the industry with significant hedge portfolios, with significant advantage of those hedge portfolios in a mark-to-market basis, Southwest Alaska, and Delta. And then there's a business customer rebound that we're not benefiting from. So, just keep that in mind, and I think when we think more long-term, we're in a really good place.

Scott Group

Management

Makes sense. Thank you, guys.

Jude Bricker

Management

Thanks.

Operator

Operator

Thank you. I would now like to turn it back to Jude Bricker for closing remarks.

Jude Bricker

Management

Well, thanks for joining the call, everybody. We'll talk to you in three months. Have a great day.

Operator

Operator

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.