Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) Q4 2022 Earnings Call Transcript

Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Welcome to the Sun Country Airlines Fourth Quarter and Full Year 2022 Earnings Call. My name is Chris, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. And I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Chris Allen: Thank you. I’m joined today by Jude Bricker, our Chief Executive Officer, and Dave Davis, President and Chief Financial Officer, and a group of others help answer questions. Before we begin, I’d 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 on management’s 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 to update any forward-looking statements. You can find our fourth quarter and full-year earnings press release on the Investor Relations portion of our website at ir.suncountry.com. With that said, I’d like to now turn the call over to Jude.

Jude Bricker: Thanks, Chris. Good morning to everybody. To review our multi-segment businesses unique in the airline industry, due to the predictability of our charter and cargo businesses, we were able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule, flexibility and low cost model allow us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to these structural advantages, we’ll be able to reliably deliver industry-leading profitability throughout all cycles. And execution of our multi-segment business is critical that we’re able to deliver industry leading operational performance. I’m especially proud that, in 2022, Sun Country delivered the industry’s best completion factor.

During the challenging December period, we delivered 99.6 completion factor, also best in the industry. So proud of our whole team that continues to come through for our customers every day. We continue to see strong demand for all segments of our business. And scheduled service, currently selling through August, we’re seeing consistently strong yields even compared to an already strong 2022. The first quarter notably, year-over-year TRASM improvement implicit in our guide is mostly a result of a strong recovery in international demand as compared to Omicron impacted first quarter 2022. This outperformance is overcoming West Florida demand which is still recovering from Hurricane Ian. All indications are that unit revenues will continue to remain strong through the summer, including observable bookings, overall industry capacity across our network, loyalty spend, contracted distribution agreements and local economy metrics.

In scheduled service, through the next year, we expect to continue to build out our MSP operation to its natural share. To that end, we’ve decided to postpone the restart of our summer Hawaiian operations until 2024. Keep in mind that, in the first quarter, which is typically our strongest of the year €“ keep in mind that the first quarter is typically our strongest of the year on constant deal and normalized demand. I expect charters to put up big growth numbers in 2023. Mostly we’re focused on long term contracted charter revenue. We’ve expanded our casino operation to five aircraft and added a second aircraft to our VIP operation. I expect to have eight aircraft committed to contract to charter flying by the end of 2023. Counting our 12 cargo aircraft, that brings our contracted fleet to 20 aircraft of the 55 we have in service.

All these aircraft fly at consistent operational levels with pass through economics. This operating base allows us maximum flexibility with our scheduled business. I expect our sports business to grow this year as well, focused on collegiate sports and Major League Soccer. Charter demand remains strong and we believe it’s generally underserved by the industry. Our cargo business will improve this year due to contracted escalation, but we expect volumes to be consistent year-over-year as we focus on building out our scheduled and charter businesses. On the fleet, we’ll continue to be opportunistic buyers. I expect most of our 2023 growth to come through utilization increases, which remain well below 2019 levels. This will allow us to deploy capital for debt repayments through amortization, consider share buybacks and some prudent infrastructure investment, like our new training centers that opened in 4Q and technology to support our operations.

I’m confident that we will continue to find the growth aircraft that we need as we need them. And with that, I’ll turn it over to Dave.

Dave Davis: Thanks, Jude. We’re pleased to report strong Q4 results, which I’ll detail in a minute, near the upper end of our guidance range for both revenue and operating margin. Adjusted pretax income for the quarter was $10.3 million, a 39% improvement over Q4 of 2021, despite an increase in fuel prices of nearly 44% and the impact of the new pilot agreement that we signed near the end of 2021. Although we are now comparing our results to prior year, it’s important to note that our Q4 adjusted pretax income is nearly 26% higher than it was in Q4 of 2019. Additionally, we grew Q4 2022 year-over-year capacity on both a system block hour and ASM basis by 10% and 14%, respectively. Q4 system block hours were 37% higher than they were in Q4 of 2019.

Let me start with a discussion of revenue and capacity. As Jude noted, the revenue environment remains very strong. Q4 of 2022 total operating revenue of $227.2 million was 31.6% higher than the year-ago quarter. The scheduled service business is particularly strong as TRASM grew 27% versus last year and an almost 14% growth in scheduled service ASMs. Ticket plus ancillary revenue grew 45% year-over-year as we saw an increase in total fare to $177.36, combined with an increase in load factor from 76.6% last year to 84.4% in Q4 of 2022. This strengthened unit revenue shows no signs of abating as we move into the first quarter. The story is the same for the full-year 2022 with scheduled service TRASM growing almost 37% on an increase in scheduled ASMs of 16%.

Both total fare of $175.29 and load factor of 83.5% were the highest full year result since 2018 when we began our conversion to a single class configuration. We finished 2022 with full year revenue of $894.4 million, a 44% increase over 2021 and a record for Sun Country. Charter revenue grew in the fourth quarter by 11% as we saw another quarter of strong growth in flying under long term contracts, referred to as program charter, and steady improvement in our ad hoc business. Ad hoc charter revenue doubled versus Q3 of 2022 and is showing steady progress as we continue to add pilots to pursue these opportunities. We’ve made a concerted effort to grow the amount of our charter business under long term contracts, and we’ve been very successful so far.

For the full year, program charter revenue was $121.7 million, nearly 2.5 times higher than it was in 2021, and we feel there remains room to grow. We added the equivalent of a third aircraft serving our Caesars contract in the fourth quarter of 2022. Full year revenue for the ad hoc charter business is still about 60% below its peak in 2019, but as we continue to add pilot resources, we expect to see steady growth in this segment. Cargo revenue grew 5% in the fourth quarter on a small decline in capacity. For the full year, cargo revenue declined 1% on a 4% decrease in cargo block hours. During the first half of the year, we had numerous Amazon aircraft in heavy maintenance, which drove the block hour decrease. Our cargo flying remains a consistent source of revenue in all environments, and we do not expect this to change in the future.

Let me turn now to costs. Our fourth quarter adjusted CASM increased 7% versus last year. For the full year, adjusted CASM increased 9% year-over-year. Similar to what we have been saying all year, the main drivers of this cost increase have been twofold. First, we have been smaller than we had initially planned to be due to labor and aircraft constraints. Second, 2022 results reflect the cost of the new pilot agreement we signed at the end of 2021. This is an important point, as the results of many of our competitors have yet to fully incorporate the cost of recently completed or upcoming new pilot contracts. Two additional aircrafts are expected to enter service in Q1 of 2023. As we grow into our expanded fleet throughout 2023, we expect to see a deceleration in unit cost increases.

Let me say a few words now about our strong balance sheet. We finished 2022 with $289.4 million in total liquidity, including $264.7 million in unrestricted cash and short term investments. Our year-end net debt to adjusted EBITDA was 2.7. During January of 2023, we completed the $25 million ASR portion of our share buyback program, repurchasing approximately 1.4 million shares at an average price of $18.23. We still have $25 million in board approved share repurchase authority and will execute any buybacks under the program opportunistically, considering the liquidity needs of the business. Let me switch now to Q1 2023 guidance. As I said previously, we’re seeing very strong demand, with approximately 80% of our planned Q1 passenger revenue already booked, and we expect the strength to continue throughout the quarter.

Total Q1 2023 revenue is expected to be between $280 million and $290 million, which would be 24% to 28% higher than Q1 of 2022. We expect total block hour growth of 3.5% to 6.5%. We’re expecting an operating margin of between 15% and 20%, assuming a fuel price of $3.58 per gallon. Just a quick reminder. Q1 is historically our strongest quarter of the year, and we expect to see seasonal trends similar to previous years. The fundamentals of our unique diversified business remain strong and our model is highly resilient to changes in macroeconomic conditions. Our focus remains on profitable growth. With that, I’ll open it for questions.

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Q&A Session

Operator: . Our first question will come from Ravi Shanker of Morgan Stanley.

Ravi Shanker: Great to hear the strong commentary for 1Q. If you can just kind of give us a little more detail there. How far out the booking curve can you see? Can you see past spring break, maybe into early summer as well? Does it feel like even the tail end of that booking curve kind of continues to remain strong, just trying to get a better sense of what the rest of the year might look like?

Jude Bricker: The main thing that’s impacting the first quarter relative to the first quarter of last year is going to be the recovery in international demand. We have a sizable international network, traditionally, during the first quarter. Last year was affected heavily by Omicron. So we’re seeing strong demand across the Caribbean, Mexican market, Central America markets that’s sort of unprecedented from my experience, looking at traffic down there. We have really good insight. As Dave mentioned, we’re over 80% sold for the first quarter. So, there’s not a lot of variance there. Most of the variance in our first quarter revenue will come from how much charters were able to sell into the March period. Looking past the first quarter, April is pretty well clear at this point.

And it continues the same trend of fairly dramatic year-over-year revenue improvements. The summer, we have a little less insight on just because the summer relative to the first quarter tends to book more close in. And we shift our network to more domestic markets and shorter haul markets, but also tend to book more close in. But if all we’re looking at is unit revenue and fares and ancillary production, things like that, for the bookings that we can see, which again for the summer period is well below 20% of our volume, it’s very, very strong. I don’t see anything that would indicate €“ I can’t find any weakness across the network. I was concerned about Ian’s impact because Fort Myers is a big part of our network in March in particular and that area of the country is mostly recovered.

It’s still lagging the strength in other areas, but there’s really no weakness that I can find anywhere across our scheduled service network.

Ravi Shanker: That’s a pretty definitive statement. Maybe as a follow up to that, kind of sounds like the biggest impediment to kind of growing into that strength is going to be capacity. Can you just comment on what the pilot availability situation is like? And what do you expect in terms of maybe any headwinds there kind of easing in the next 12 months?

Dave Davis: Our pilot situation continues to get better. As we’ve detailed and talked through a number of times, we’ve had some particular issues in our training pipeline. We continue to have no issues with sort of recruiting pilots to come to the company. So that continues to hold. We’re making steady progress, like identifiable improvement in pilots that are going to the line here, especially over the last two or three months. We expect that positive momentum to continue in the back half of the year. I think I mentioned 3.5% to 6.5% block hour growth for the first quarter. I think we’re looking now at block hour growth for the year of around 10%. So we’ll be accelerating as we move into the summer months, and then into the back half of the year.