Sun Country Airlines Holdings, Inc. [SNCY] Conference call transcript for 2022 q3
2022-11-01 21:13:13
Fiscal: 2022 q3
Operator: Welcome to the Sun Country Airlines Third Quarter 2022 Earnings Call. My name is Liz, and I will be your operator for todayâs call. At this time, all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. Please be advised that todayâs 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: Thank you. Iâm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President and Chief Financial Officer and a group of others help answer questions. Before we begin, I would like to remind everyone that during this call the company may make forward looking â certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements which are based on managementâs current beliefs, expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release on our most recent SEC filings. We assume no obligation â to update any forward-looking statements. You can find our third quarter earnings press release on the Investor Relations portion of our website at ir.suncountry.com. With that said, I would now like to turn the call over to Jude.
Jude Bricker: Thanks, Chris. Good afternoon, everybody. We have much to be excited about in our 3Q results. Iâm particularly pleased though with our performance operationally. Since July 1st, weâve run a 99.8% controllable completion factor with 83% A14. Today, itâs been 96 days since we had a cancellation. This would block our growth of over 15% versus the same quarter in 2019. Operational results like these are a team effort, and Iâm really proud of what our folks were able to deliver after coming through a tough spring. Since the demand environmentâs rapid recovery began earlier this year, our focus of Sun Country has been to staff for growth to restore passenger fleet utilization to pre-pandemic levels. We continue to find sufficient new hires to meet our goals. However, particularly in the case of pilots, we continue to work through training overhang. Last quarter, we were constrained primarily by first star officers, this quarter captain availability has become the constraining input. As our rapid hiring works through our training program, we expect fleet utilization to continue to improve into the beginning of 2023. Increased utilization is very valuable in this demand environment. Our scheduled service TRASM in 3Q improved versus 2019 by over 46%. Our TRASM improvement exceeds that of the industry as a whole due to our sculpted scheduling and the strength of the Sun Countryâs brand in our local market. Based on our sales for travel into 2023 in industry schedules, we anticipate yield strength to continue for the foreseeable future. In scheduled service, weâre still seeing strength across all our markets, leisure, VFR, international, domestic, peak and off peak. Our charter business continues to show yield improvements as well. Due to the lower cost of incremental capacity adds in the strong yield environment, we expect margins to widen in the next year. The West Coast of Florida is an important destination for us, particularly in the winter travel season. Our thoughts go out to the people of that region as they work to recover from the tragedy of the Ian. For Sun Country, anticipating the demand recovery to that region is challenging. Typically, Fort Myers in particular is an increasingly larger part of our network through our March peak. Weâve made cuts through the end of the year and continue to monitor bookings through the first quarter. Our customers will travel, however, we have less certainty about historically reliable demand. Weâve launched two new markets into Florida, and weâll redeploy capacity to other sunny destinations. However, the uncertainty is why we have a wider guide than usual for the fourth quarter. We expect the region to fully recover and weâll be there along the way. One benefit of our model thatâs good to highlight in a rising rate environment is our flexible fleet strategy. We buy used aircraft in the spot market, so prices will adjust to finance costs, global weakness and a strong dollar. And the timing of our deliveries will be in response to our staffing levels. Based on our current fleet commitments, we expect the fleet to grow to 54 aircraft, while also reducing net interest expense in â23 over â22. To summarize, weâre not limited by opportunities, capital nor aircraft. And Iâm pleased with the progress weâre making on staffing 4Q and 2023 are setting up very well for us. And with that, Iâll turn it over to Dave.
Dave Davis: Thanks, Jude. Before I get into a discussion of our results, I want to point out that Iâll be making comparisons about last year as well as 2019 in some cases. Weâve been quicker to get back to a more normalized environment and year-over-year changes are often more indicative of our progress at this point. Sun Country posted an adjusted operating income of approximately $16 million for the quarter in an adjusted EPS of $0.12 per share. Adjusted operating margin was 7.2%, well ahead of our prior guidance. We achieved these results despite continued industry challenges, including third quarter fuel prices being 75% higher than last year, lingering under capacity driven by staffing issues and the impact of Hurricane Ian in the State of Florida. Let me start with a discussion of our revenue and capacity. Third quarter revenue totaled $221.7 million, a 28% increase versus last year and 29% better than 2019. We estimate Hurricane Ian drove about $1 million in lost revenue during the third quarter. Demand continues to be robust. Q3 scheduled service revenue was $152.5 million, a 34% increase year-over-year. Q3 scheduled service TRASM increased a very strong 39% versus last year, and 46% versus Q3 of 2019. Scheduled service TRASM continue to improve within the quarter as July increased 33%, August 39% and September 55% versus the same period last year. Total fare increased 16% versus last year to $167.73. Combination of higher fares and an increase in scheduled service load factor of almost 10 percentage points year-over-year is indicative of the strong leisure demand environment that weâre â that we continue to see. Charter revenue for the quarter was $42.9 million, a 27% increase year-over-year, driven by a large increase in flying under our long-term contracts, such as for MLS and Caesars. Q3 charter flying under our long-term contracts made up 80% of our charter block hours. While weâve been able to sequentially grow our ad-hoc flying, capacity remains constrained as we focus resources on other flying. As we continue to make progress towards normalized pilot staffing levels, thereâs a large opportunity and simply returning to historical levels of ad-hoc flying. Versus the third quarter of last year, ad-hoc charter flying is almost 70% lower. Cargo revenue for the quarter of $23.7 million was 3% lower than Q3 of â21. This reduction is due entirely to a one-time payment from Amazon in Q3 of last year for flying that had been done soon after we started our cargo operations, but had not yet been billed. Total block hours grew 2% year-over-year and 15% versus 2019. Since Q3 of â21, our average passenger aircraft count grew 12% and our cargo aircraft count remained flat. As was the case in Q2, weâre still working through the process of expanding our pilot production pipeline. As such, the utilization of our fleet was 6.4 hours in the third quarter of this year versus 7 hours last year. On a normalized basis, we expect aircraft utilization to be on the order of 8 hours per day, which provides us with significant opportunity for very high-margin earnings growth as we return utilization to normal levels. Weâre planning for fleet growth through the remainder of 2022 and into 2023. The aircraft we have already purchased, one entered service in Q3 and five more will enter service during Q4 and Q1 of â23. Additionally, weâre in the process of acquiring three aircrafts to be delivered during Q4 of â23 and Q1 of â24. And those aircraft will enter service in early â24. We continue to pursue opportunistic purchases of aircraft to support our capacity growth. Let me turn now to costs. Our Q3 adjusted CASM increased 18% on flat total ASMs versus the same period last year. The increase in our non-fuel CASM is largely driven by the fact that our aircraft utilization remains lower than target in the impact of our new pilot agreement, which we signed at the end of last year. We paid an average of $3.93 per gallon for fuel in Q3 â22, to 75% higher year-over-year. As a reminder, given our differentiated business model, we pass on approximately a third of our total fuel usage to our cargo and charter customers. Weâve been able to offset a large portion of our higher costs through continued growth and improved unit revenues. Turning now to our guidance for Q4. Weâre expecting to grow block hours between 9% and 12% versus the same period in 2021 as weâve consistently seen leisure demand remains very strong. We expect total revenue to increase between 27% and 33% year-over-year to $220 million to $230 million. At $3.75 jet fuel, weâd anticipate an operating margin of between 4% and 8% in the fourth quarter. Weâre giving a little wider guidance range in our numbers as usually the case. As Jude mentioned, weâre still assessing the impact of Hurricane Ian on our bookings in Southwest Florida during Q4. Finally, we announced that the Sun Country Board of Directors has authorized us to repurchase up to $50 million worth of Sun Countryâs shares. Our intent is in the near term is to enter into a $25 million accelerated share repurchase agreement, allowing us to quickly acquire a portion of these shares. Apollo does not intend to sell shares as part of the buyback program. Our balance sheet is very strong, with $318 million in total liquidity as of October 31st, which includes $25 million in an undrawn revolver. At the end of the third quarter, our net debt to EBITDA ratio was 3 times which is among the lowest for airlines in the US. Weâve invested heavily in our staff members, purchased the new aircraft we need to grow and steadily paid down our aircraft debt as it comes due. Weâve used Sun Countryâs shares as a good investment, especially at current values, and we have sufficient liquidity to return capital to our shareholders in a prudent manner. We believe the fundamentals of our business remain strong, and as we continue to demonstrate our model is highly resilient to changes in macroeconomic conditions. Our focus is and will remain on profitable growth. With that, Iâll open it up for questions.
Operator: At this time, we will conduct the question-and-answer session. Our first question comes from Ravi Shanker at Morgan Stanley. Your line is now open.
Ravi Shanker: Thank you. Good afternoon, gents. Dave, your unique seasonality kind of gives you probably a little more kind of forward look than many of your peers maybe into â23 even. Can you give us an update on what your kind of booking curve looks like for like January or maybe even beyond that in the spring break if youâre having?
Jude Bricker: Hey, Ravi itâs Jude. Weâre selling through May right now and weâve seen the fair improvements that weâve seen in the reported period continue out through the entire selling cycle. So you know itâs too early, obviously to make predictions on year over three or year over TRASM improvements into that period. But thereâs no sign of any slowdown in the leisure space. Keep in mind, while we do have a leisure focus, we are fairly focused geographically, particularly in the wintertime with Minneapolis origination in the surrounding region into you know, sunny destinations across the south, Mexico and Caribbean. So from what weâre seeing, it looks really good.
Dave Davis: Yeah, yeah. No slowdown like we sort of talked about previously, neither bookings or in TRASM growth.
Ravi Shanker: Great. And then maybe as a follow-up, can you remind us what the economic sensitivity of the charter business looks like? I mean, it sounds like if youâre shipping like sports teams around the country, it doesnât sound particularly macro sensitive. But how has it done in previous recessions?
Dave Davis: I mean, I think particularly as the business is now configured, itâs probably even more resilient than it has been in the past, which it typically is. I mean, the vast bulk of our flying now is under contract and thatâs under contract for things like Major League Sports, some casino flying, which proves to be pretty resilient during recessions. Some other sort of specialty stuff that weâre doing under contract. So I think itâs probably very resilient â in recessionary periods. You know even some of the ad-hoc stuff, we think we can get back even if we sort of enter into a recessionary mode, the military stuff and so forth. So that business I think is going to be â will be strong in all conditions.
Ravi Shanker: Very helpful. Iâll pass it along. Thank you.
Operator: Thank you. The next question is from Duane Pfennigwerth. Duane, the queue is open.
Duane Pfennigwerth: Hey, thank you. So maybe you could give us some detailed thoughts about 2023. But Iâm just wondering you know hypothetically, if we had a blank sheet of paper you know where would you be deploying the most incremental capacity across the three segments? You know where are you seeing the highest incremental margin opportunity across the three segments today?
Jude Bricker: Scheduled service particularly. So itâs a seasonal function. Hey, Duane, itâs Jude by the way. Scheduled service in our peak periods, is clearly the best opportunity that we have. Itâs also the one thatâs being cut the most due to crew availability, because a lot of the other segments are long-term contracts, which is great. But itâs also you know when we have these kind of really rapid yield recovery environments like weâre in today, we canât put a lot of capacity into these peak periods. So theyâre cut pretty heavily. But in the summertime you know itâs our big city connectivity we really outperformed. I think thatâs consistent with what the whole industry is seeing. And in the wintertime, itâs the very well established leisure destinations that tend to consume a big portion of our network like Minneapolis to Cancun, Fort Myers, Orlando, Vegas, LA, Phoenix. And thatâs where â thatâs where we put incremental capacity and it would â it wouldnât affect the yield in those markets. And it could absorb a tremendous amount based on the bookings weâre seeing.
Duane Pfennigwerth: That makes a lot of sense. Thanks for that. And then just on maybe charter and cargo, is you accounted for you know the same way across those segments and maybe within charter, do you have you know some charter agreements where you know fuel is a pass through and others where it might be you know reported differently, just if you could help us think about how fuel flows through those two segments?
Dave Davis: Yeah, so on the charter side itâs typically not a straight pass through. When an agreement is signed with a charter customer, thereâs typically a reference price thatâs inherent in the per block hour rate that the contract is set at. Then if fuel goes up, there is additional reimbursement from the charter customer, which is a revenue item. On the cargo side, that is in fact a straight pass through with Amazon paying for the fuel and therefore the fuel cost netting out not showing up in our fuel line.
Duane Pfennigwerth: Okay, very clear. Thank you.
Operator: The next question is Thomas Fitzgerald with Cowen. Thomas, your line is live.
Thomas Fitzgerald: Hi, thanks very much for the time. Just two quick ones for me. I was just wondering if you could provide a little bit more color on just the hiring and training pipeline and howâs that going? As well, just also wanted to curious if you could just talk about the benefit youâre seeing from highest interest rates that we saw the interest income line and it really jumped this quarter. So thanks very much.
Jude Bricker: Hey, Tom. Yeah, I mean Iâll take the last and first, which is just to say, I was just calling it out, because it will be probably an outlier in the industry. And that is to say, we donât have any requirements for debt and supportive any of our CapEx and we donât have a lot of CapEx planned for next year. And also with the spot market being the source of airplanes, we expect you know if you did see a global recession or you know even regional recessions around the world, then there would be more and cheaper airplanes coming available to our benefit. On the first part, you know weâre hiring full classes every month. So weâre getting all the new hires we need, thereâs not a whole lot of you know adding to that wouldnât help us that much, because now weâre to the stage where we have sufficient FOs, we just need to transition FOs into the captain seat. And the process is taking several months to kind of get through â gearing up our new hire process into being able to handle classes of the side that weâre doing about 20 to 25 a month, and then gearing up all the infrastructure we need in order to upgrade FOs into captains. So thatâs ongoing. You know I think what everybody really wants to hear is, when weâre going to kind of get back to where utilization is what it is and the â is what it was and we have the pilots we need to fly this fleet to its optimal level. And weâre still probably several months out you know say, six months until we kind of get caught up to ourselves. Keep in mind, the fleet grew for us about 70% since pre-pandemic levels, because we onboarded a whole cargo fleet through the pandemic. So we got a lot of catching up to do and itâs probably going to take us another six months. But the encouraging part is, we build out the infrastructure, we opened a training center this month with two new SIMs. We have the SIM instructors, we have the check airman we need, we have the new hires we need. Itâs just about getting everybody through the pipeline. And so we have line of sight on finishing up and get back to where we need to be. And you know a lot of my commentary is really around â that flying thatâs going to be facilitated by that crew growth is really, really valuable in this environment. As we pointed out itâs the flying that has been cut the heaviest because of crew shortages.
Operator: All right. The next question is from Michael Linenberg. Michael with Deutsche Bank. Well your line is open.
Michael Linenberg: Yeah. Hey, good afternoon, everyone. Well congratulations on being the first to announce the pro shareholder initiative. So thatâs great in the industry.
Jude Bricker: Thank you, Michael.
Michael Linenberg: Yep. Youâre welcome. With respect to the excise tax on share repos, does that â that doesnât kick in until January 1st, 2023. Is that right? Or is it before that?
Dave Davis: No, thatâs right. So basically weâre structuring this is, is our intent when we donât have the paperwork totally finalized, but weâre very, very close, is to do a $25 million ASR and then $25 million open market. the ASR portion, the shares at auction, the vast bulk of them will be delivered to us very quickly, which means, weâll basically be able to take possession before that excise tax kicks in on that full â on that first 25.
Michael Linenberg: Great. Thatâs fantastic news. My second question, Jude I just want to go back to you know you did call out captain availability, and Iâm not sure if itâs just that you aggressively hired a lot of first officers and that resulted in an imbalance on crews or if youâre still seeing some more senior pilots defect to other carriers? Can you just elaborate on that?
Jude Bricker: Yeah, thatâs the easy one. I mean weâre seeing attrition below what we had expected it to be. So weâre not losing captains. Weâre losing some FOs, but for the most part, our captainsâ attrition is de minimis, itâs just about giving them into the less seat at this point.
Michael Linenberg: Okay, great. And then, Dave, Iâll just squeeze in a quick one on cash taxes, when I think about you know some of the losses that you and others have incurred. I mean youâve been mostly profitable over the last year, year and a half, you were the first back to profitability. But should âyou know your cash taxes, is that going to be still? Thatâs going to be a very low rate when we think about from a cash flow perspective? I just â if you can just remind us on your status on it. Thank you. Thanks for taking my questions.
Jude Bricker: Thanks, Mike.
Dave Davis: Yeah, so the answer on the cash taxes piece is effectively we will be close to full cash taxpayers. And here - hereâs why. While we had a sufficient where we had a significant NOL that we sort of carried through from you know from many years ago. We also have a TRA agreement in place with our largest shareholder where basically the value of that NOL is essentially paid out to the â to our shareholders over you know as we generate earnings. So effectively if you look at the cash flow of the business, weâd look like full cash taxpayers.
Operator: The next question is from Christopher Stathoulopoulos from Susquehanna. Chris, youâre live.
Christopher Stathoulopoulos: Thank you. Good afternoon. So, Dave, the eight hour utilization target you mentioned in your prepared remarks, is that based on the active fleet today or with the additional aircraft that youâre planning on taking in? Also whatâs the ceiling that you believe you can comfortably run the fleet at into 2020 upgrade?
Dave Davis: Yeah, well the 8 hour number is sort of our â is where we would like the fleet utilization to be. So like I said, weâre in the 6s now, weâre going to be taking additional aircraft into service as we add pilots, thatâll sort of stay flattish, and then start to drift up in 2023. And we ultimately hope some time later in â23 to be at that 8 hour number. The â we were doing like 9 hour utilization numbers in 2019, which is probably unsustainably high because at that time, we were doing some flying red eye stuff and other things that really wasnât that great. So weâre probably not going to be doing that anymore. So I think if weâre hitting 8 hours a utilization, thatâs where we need to be and thatâs a â23 into the second half of â23 number.
Jude Bricker: I will comment that our utilization is somewhat a function of the fuel price. So as fuel prices rise, marginal flying is cut, and therefore we were able to manage pass through more effectively the most carriers and as fuel prices fall we can increase utilization to absorb the increased marginal opportunity. So 8 hours is kind of where we would like to be. But you know that number could be higher or lower, depending on where fuel goes.
Dave Davis: Yeah, and one other thing, I think because itâs you know the model is a little bit different than some others. So remember, the utilization is not a steady utilization day by day, it is very, very dependent on peak periods. So into the â you know low teens hours per day utilization at peak times, and then significantly lower than that on trough days. So weâre trying to keep the peak utilization as high as possible and the troughs are going to be lower troughs than they typically would be. And the average of those things is whatâs leading to the â to the lower utilization than we want to see.
Christopher Stathoulopoulos: Okay. And the follow-up, so, Jude with the ATSA with Amazon, are there â just remind us if there any contractual minimums with that flying? And then how soon in advance do you know how much youâre going to be flying? So for example, at this point, you have the schedule in place for this yearâs peak season. Thank you.
Jude Bricker: Sure, Chris. So thereâs no minimums. You know right now the flying, because the pilots would be more efficient flying something else is probably we would like to be a little bit smaller and you know in the immediate future. But there are no minimums in the contract. And in the schedule cycle isnât delineated clearly, but weâre on a pretty good pace of about 90 days, for 90 days. So 90 days out, weâre planning the schedule for the 90 â 91st to 180th day, and that kind of repeats itself. And the schedule is very fluid, the volumes have been pretty consistent, but the schedule as to where the airplanes fly and when they go, itâs pretty fluid. So this â these schedules move around quite a lot. And so you know I think one of the main things is that, weâre one of the carriers, the few carriers, perhaps that can do this for them, because itâs so you know, itâs also a schedule carrier where youâre used to so consistent planning. Itâs just a very fluid environment in cargo.
Dave Davis: Yeah. One other thing that to point out, though, is, while there are no flying minimums, the revenue from Amazon comes in the form of both a fixed payment per aircraft not utilization dependent, and then a per block hour number. So while there arenât minimums there is a fixed payment for aircraft that we receive simply for operating the airplane.
Christopher Stathoulopoulos: Okay, thank you.
Operator: All right. If there arenât any further questions, that does conclude our Q&A section of the call. I will now turn it back over to your CEO, Jude Bricker.
Jude Bricker: Thanks for your interest everybody. I hope you have a great afternoon and weâll talk to you again at the end of the year. Thanks.
Operator: That does conclude the conference. Thank you for joining. You may now disconnect.
