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Sun Country Airlines (NASDAQ: SNCY)
Q3 2024 Earnings Call
Oct 31, 2024, 8:30 a.m. ET
Sun Country Airlines Reports Strong Q3 Results Despite Industry Challenges
Inside the Earnings Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to Sun Country Airlines’ third quarter 2024 earnings call. My name is Daniel, and I will be your operator for today’s event. All participants are currently in listen-only mode. After the presentations, there will be a question-and-answer session.
[Operator instructions] Please be advised that today’s conference is being recorded. I will now turn the call over to Chris Allen, director of investor relations. Mr. Allen, you may begin.
Chris Allen — Director, Investor Relations
Thank you. Today, I’m joined by Jude Bricker, our CEO; Dave Davis, our president and CFO; and other members of our team to answer your questions. Before we begin, I want to remind everyone that we may discuss forward-looking statements during this call. These statements are based on management’s current beliefs and assumptions, which are subject to risks and uncertainties. Actual results may vary. Please review the risk factors in our earnings release and recent SEC filings. You can find our Q3 2024 press release on our website at ir.suncountry.com.
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With that said, I’ll turn it over to Jude.
Jude Bricker — Chief Executive Officer
Thanks, Chris. Good morning, everyone. Happy Halloween! Our business model is distinct within the airline sector.
Thanks to our charter and cargo operations, we can offer the most flexible flight schedules in the industry. This flexibility, combined with our low fixed costs, allows us to adjust well to shifts in leisure travel demand as well as unexpected industry challenges. Because of our unique advantages, we expect to maintain profitability across various market cycles. As of June, domestic industry capacity growth peaked at nearly 7%, but the rate has since declined.
By January, we anticipate flat year-on-year growth in domestic capacity, with decreases across our network. Many airlines have acknowledged that some recent capacity additions were not profitable and are being scaled back.
In contrast, Sun Country continues to expand while producing profits and generating healthy cash flow. Our future selling month unit revenues are showing positive year-over-year changes. While revenue trends for flights may lag, we now predict that Q4 TRASM will be roughly flat compared to last year. Given the current industry schedules, I am optimistic about unit revenue trends for next year.
Our charter and cargo segments are showing favorable yield trends. We’ve largely overcome post-COVID inflation challenges, expecting only minimal rises in costs (excluding fuel). As displayed in our Q4 outlook, we foresee an expansion in profit margins and remain optimistic looking into 2025.
Aircraft availability has been a hot topic among airlines, but our 2025 and 2026 fleet growth is well-supported, as all necessary aircraft are already active with other airlines. We have them leased or booked through our cargo program. About borrowing costs, we continue to generate free cash flow, fulfilling our modest capital expenditure needs which help reduce our debt levels as we grow. Our management team is focused on improving operations and service delivery. We faced challenges last summer, including hurricanes and IT issues, yet since August 1, we’ve achieved a 99.5% controllable completion factor. I’m proud of our amazing team that manages these challenges. Now I’ll pass it over to Dave.
Dave Davis — President and Chief Financial Officer
Thank you, Jude. I’m happy to report that Q3 marked our ninth straight profitable quarter, with Sun Country boasting some of the highest margins in the airline industry. Our cargo and charter businesses have shown robust growth, helping to balance out any pricing pressures from the scheduled service sector this year. As the industry rationalizes capacity, we’re seeing a more favorable pricing environment for Q4 and into Q1 of 2025.
Sun Country has efficiently aligned capacity with market demand; we’ve scaled back our scheduled service growth to 5.8% in Q3, down from over 18% in the second quarter. We’re planning for this growth to ease further in Q4, with projected service growth slightly above 3% year-over-year. Now, let’s dive into Q3 specifics, beginning with revenue and capacity numbers.
In the third quarter, total revenue reached $249.5 million, remaining stable compared to Q3 2023. Revenue for our passenger services, which cover scheduled flights and charters, declined by 3% year-over-year, with scheduled service revenue decreasing by 5.9% due to an 11.1% drop in scheduled service…
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Sun Country Airlines Faces Challenges but Sees Steady Growth Ahead
TRASM was notably influenced by factors such as industry overcapacity, the CrowdStrike outage, and hurricanes in Florida.
Mixed Results for Scheduled Service Capacity
During the quarter, we cut back on our scheduled service capacity. July saw an increase of 12% year-over-year, but by September, it had declined by 10%. Typically, changes in capacity have a delayed impact on flown fare levels, taking a couple of quarters to fully materialize. However, we believe our current capacity allocation for Q4 and Q1 ’25 aligns well with customer demand. For Q4, we expect scheduled service TRASM to remain flat compared to Q4 ’23, while overall TRASM, including our charter business, is projected to grow by low single digits year-over-year. Charter revenue reached $51 million in the third quarter, a record for Sun Country, partially balancing weaknesses in scheduled service.
Charter Business Shows Positive Growth
This achievement was bolstered by a 1.7% rise in charter block hours and a 5% increase in revenue per block hour. The improvement in charter unit revenue stemmed from renegotiated rates and a favorable mix of operations. Although unit revenue growth could have been much higher, reduced fuel prices lowered the reimbursement we received from our charter customers. Remarkably, over 80% of our charter revenue was generated from flights under long-term agreements during this quarter.
Cargo Segment Hits New Heights Despite Challenges
In our Cargo segment, revenues increased 11.9% in Q3, reaching $29.2 million—an all-time quarterly high. This growth occurred even with a 3.6% decline in cargo block hours caused by aircraft undergoing heavy maintenance and flight cancellations due to hurricanes in the Southeast. Cargo revenue per block hour rose by 16%, attributed to rate changes from our extended Amazon agreement and annual rate escalations. Looking ahead, we anticipate significant growth in cargo operations in 2025 with the addition of eight new freighter aircraft.
Cost Management and Financial Outlook
We maintained fiscal discipline as Q3’s CASM decreased by 1.9% compared to the same quarter last year, even though adjusted CASM rose by 3.7% due to slower growth. Ground handling expenses surged 23.3% year-over-year, driven by increased flying volume and higher outsourced costs. Additionally, we faced a 14.5% rise in landing fees and airport rent, reflecting the end of COVID-era relief payments. As we transition into Q4, the deceleration in scheduled service may continue impacting adjusted CASM.
Our total liquidity stood at $165 million at the end of Q3, increasing to approximately $184 million as of October 30. To date, we have invested $42.6 million in capital expenditures, with a projected total of around $75 million for full-year 2024. Currently, we do not foresee acquiring any additional aircraft until evaluating future needs for 2027. Our free cash flow remains strong, and we expect to finish the year with a net debt-to-adjusted EBITDA ratio of 2.3 times.
Future Guidance and Strategy
Looking forward, we anticipate total revenue for the fourth quarter to be between $250 million and $260 million, driven by a 2% to 5% growth in block hours. Our expected fuel cost per gallon is $2.47, with an anticipated operating margin between 7% and 9%. The business is structured for resilience, enabling us to allocate capacity across segments to optimize profitability and reduce earnings volatility.
Questions & Answers
Operator
[Operator instructions] Please limit yourself to one question and one follow-up. Thank you for your cooperation while we compile the Q&A roster. Our first question comes from Duane Pfennigwerth with Evercore ISI. Your line is open.
Duane Pfennigwerth — Analyst
Good morning! Thanks for the updates. Regarding the Cargo segment, have you reached the full run rate on the current business, or is there more growth expected? Additionally, can you provide an update on the timing for the new cargo aircraft planned for 2025?
Dave Davis — President and Chief Financial Officer
Not all rate improvements from our new agreement are reflected in the current numbers. Some adjustments occurred this year, but we expect two more next year as the new aircraft become available. The first new cargo aircraft is set to arrive in late Q1 or early Q2, with the final one anticipated in late Q3 or early Q4 of 2025.
Duane Pfennigwerth — Analyst
Great, thank you for clarifying. I also wanted to ask about the seasonal flying outside of Minneapolis. Have there been any changes in your strategy for those routes? Are any new markets being considered?
Jude Bricker — Chief Executive Officer
For non-Minneapolis routes, capacity is primarily a summer concern. Next summer, we are likely to reduce scheduled service capacity compared to this year due to the cargo expansion. While we expect overall block hours for the year to increase by about 10%, non-Minneapolis flying will see minimal changes, so no new markets are planned for next summer.
Duane Pfennigwerth — Analyst
Understood. Thanks very much.
Operator
Thank you. Our next question comes from Ravi Shanker with Morgan Stanley. Your line is now open.
Unknown speaker — Morgan Stanley — Analyst
Hi, good morning. Kathryn here, asking about the Oman aircraft you’ve leased. Will you continue leasing those or incorporate them into your fleet?
Dave Davis — President and Chief Financial Officer
We will certainly be adding those aircraft to our fleet. We have five in total, one of which is scheduled to redeliver this year and enter service shortly.
Sun Country Airlines Discusses Future Plans and Strong Booking Trends
Sun Country Airlines is actively addressing its growth strategy while navigating the challenges of aircraft deliveries and industry capacity fluctuations. The company expects to see continued cargo growth and emerging opportunities in passenger services.
Aircraft Leases Adjustments Amid Industry Delays
Due to delays from original equipment manufacturers (OEM), Sun Country anticipates extending some aircraft leases. This adjustment aligns with the demand from other airlines and supports the cargo growth anticipated for next year. It is likely that parts of the fleet will remain in service until at least 2026 before they are returned, allowing the airline to better meet operational needs.
Strong Q1 Bookings Point to Positive Trends
Chief Executive Officer Jude Bricker noted that the airline recently loaded its summer schedules, but lacks significant booking volumes beyond April. He is optimistic, mentioning that first-quarter bookings appear strong, showing positive year-on-year trends. In particular, the data available suggests healthy growth in their booking profile.
Passenger Capacity Adjustments for 2025
Analyst Brandon Oglenski inquired about capacity changes for the upcoming year. President and Chief Financial Officer Dave Davis provided an update, indicating that initial plans for a 10% reduction in scheduled service capacity might shift to mid-single digits. Improved pilot availability has led to this reassessment, and the airline plans to increase service as the workforce and delivery timelines become clearer.
Booking Characteristics Reflecting Market Behavior
Oglenski also asked about how the capacity reductions would affect fare pricing. Davis explained that current trends show leisure passengers tend to book earlier. Although there’s an upward trend in booked fares, it may take time to translate this into flown revenue, as these fares are typically paid in advance.
Other Revenue Increases and Future Cash Flow Plans
Shannon Doherty of DB highlighted a remarkable 48% year-over-year increase in other revenue, primarily driven by income from leased aircraft. Davis mentioned that while the company’s free cash flow profile looks promising, there are no immediate plans for share buybacks due to ongoing debt amortization. There is consideration to revisit buybacks as cash accumulates in future months.
Booking Trends Boosted by Seasonal Calendar Shifts
Tom Fitzgerald from TD Cowen asked about ticket pricing trends recently. Bricker responded positively, stating that trailing fares have increased compared to the previous year for all major selling months. He noted favorable calendar shifts this year, such as a later Thanksgiving and midweek holidays, which extended the winter travel season and reduced typically weak periods in bookings. Markets including Minneapolis, Las Vegas, Los Angeles, Orlando, and Cancun are seeing particularly strong demand, with minimal disruptions from recent challenges in regions like West Florida due to hurricanes.
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Company’s Cargo Operations Show Strong Performance Despite Seasonal Variability
Tom Fitzgerald — Analyst
Bookings look promising as we approach the December schedule.
Tom Fitzgerald — Analyst
As a follow-up, could you elaborate on the seasonality of cargo block hours for 2026, once all Amazon planes are operational? Any insights would be appreciated.
Jude Bricker — Chief Executive Officer
The revenue for our cargo business shows some fluctuations. However, the primary factor affecting quarterly changes is check volume; specifically, which aircraft are undergoing checks. Overall, this business remains stable throughout the year, which we anticipate will continue. Although Amazon Prime periods may present some challenges, the impact is minimal.
Operator
Thank you. [Operator instructions] Our next question comes from Scott Group with Wolfe. Your line is open.
Scott Group — Analyst
Good morning. I’d like to discuss cargo revenue per block hour, which has risen 7% from last quarter and 16% year-over-year. How do these numbers reflect the new agreements with Amazon? Additionally, can we expect similar increases from the two remaining adjustments next year? I’d like to gauge where we might see revenue per block hour by the second half of next year.
Dave Davis — President and Chief Financial Officer
The 16% annual growth includes escalators, while the 7% quarter increase is more indicative of the new contractual terms with Amazon. We anticipate two additional increases next year, likely paralleling the one we just implemented. By the end of 2025, we expect all adjustments to be finalized.
Scott Group — Analyst
That’s helpful to know.
Jude Bricker — Chief Executive Officer
It’s also important to note that our rate structure includes fixed, departure, and block hour components. Therefore, fluctuations in utilization—primarily due to maintenance schedules—can affect the per block hour rates you’re observing in our financial results. This means changes in rates are impacted by several factors.
Scott Group — Analyst
Got it. You mentioned that bookings are favorable and that RASM is stable in Q4. Since leisure travelers tend to book in advance, do you foresee the positive fares translating to positive RASM in Q1, or has early booking hindered that potential?
Jude Bricker — Chief Executive Officer
We’re not providing guidance for Q1. However, it’s worth mentioning that we noticed a positive booking trend a few months ago, which should improve our bookings for October, November, and December compared to last year, which were negative. Although it may take time for overall TRASM to align, we are optimistic about this trend continuing going forward.
Scott Group — Analyst
Understood. Lastly, with anticipated schedule reductions and mid-single-digit cargo growth next year, what should we expect for CASM?
Dave Davis — President and Chief Financial Officer
We are still finalizing our plans. However, since our passenger operations influence CASM more than cargo, we predict a mid-single-digit increase next year, with potential adjustments as our plans solidify.
Scott Group — Analyst
Thank you for the clarity.
Dave Davis — President and Chief Financial Officer
Thank you, Scott.
Operator
Thank you. There are no more questions at this time. I will now turn it back to Jude Bricker for closing remarks.
Jude Bricker — Chief Executive Officer
Thanks for your interest, everyone. We appreciate your attention to our booking trends, which we discussed in detail today. We look forward to updating you in 90 days. Have a great day!
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants:
Chris Allen — Director, Investor Relations
Jude Bricker — Chief Executive Officer
Dave Davis — President and Chief Financial Officer
Duane Pfennigwerth — Analyst
Unknown speaker — Morgan Stanley — Analyst
Brandon Oglenski — Analyst
Shannon Doherty — Analyst
Tom Fitzgerald — Analyst
Scott Group — Analyst
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