Welcome to the Sun Country Airlines’ Second Quarter 2021 Earnings Call. My name is Brian, and I'll be your operator for today's call. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

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 risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release and most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our second-quarter earnings press release as well as our 10-Q on the investor relations portion of our website at ir.suncountry.com. With that, I would like to now turn the call over to Jude.

Thanks, Chris. Good morning, everybody. Welcome to Sun Country's second-quarter earnings call. Our multi-segment business model is unique in the airline industry. Due to the predictability of our cargo and charter businesses, we are able to deliver the most flexible scheduled service capacity in the industry. The combination of our scheduled flexibility and low fixed-cost model allows us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to our structural advantages, we will be able to reliably deliver strong profitability throughout all cycles. As demonstrated in the second quarter, we are clearly pleased with our results. We are experiencing a rapid recovery in demand for our scheduled service. In June 2021, our scheduled service TRASM exceeded our comparison for June 2019, and advanced bookings throughout our selling schedule continue to pace ahead of their pre-pandemic comparisons. Demand is particularly strong in domestic leisure, which represents most of our network. Additionally, we're seeing fall charter demand near pre-pandemic levels with the return of fall NCAA football. Of course, our cargo business continues to perform well. Currently, we're focused on two corporate priorities. First is delivering quality operational results while building the airline back to pre-pandemic utilization levels. This is a big lift for us as July 2021 departures will already exceed our July 2019 departures by nearly 16%. Currently, we're hiring across all major labor groups to meet our operational growth needs. Thus far, we've been successful, delivering over 99.9% controllable completion factor, meeting our goals for on-time and baggage metrics. I'm so proud of the talent and hard work demonstrated every day by our frontline employees and our operational leadership. Second is making some strategic investments afforded to us by our balance sheet strength and historically cheap asset prices across commercial aviation. Mostly, that means fleet growth at appropriate prices; we're willing to spend on future fleet needs, even if that means running a small short-term surplus. Thus far, we've committed to three growth aircraft that we previously reported, but we're in late-stage negotiations on several larger aircraft deals. Aside from fleet opportunities, we found compelling investments in engines with a commitment on five engines and in infrastructure as we recently closed on the purchase of our own flight simulator. And with that, I'll turn it over to Dave, who will discuss our financial results and outlook in greater detail.

Thanks, Jude. I'll now review our second-quarter financial results in more detail and provide an update on our balance sheet and liquidity position before moving into Q&A. For the three months ended June 30, 2021, total operating revenue was $149.2 million, a decrease of 12% versus the second quarter of 2019 and a dramatic improvement versus the trough of the pandemic in the second quarter of last year. This 12% decline compares to a 35% decline in Q1 2021 revenue versus Q1 2019 revenue, demonstrating the strong, steady sequential improvement that we're seeing. Q2 revenue was also significantly higher than our total revenue expectations that we described in early May. This increase was predominantly in unit revenue as our capacity was largely in line with our expectations. For the quarter, our total revenue per ASM, or TRASM, which excludes cargo revenue while including our charter revenue, was down 9% versus Q2 of 2019, while our total ASMs declined 19% versus the same period. Our ancillary revenue per passenger continues to be strong at $41.66, or 26% higher than Q2 of 2019, and our average fare was $95.81, or 11.2% lower than Q2 of 2019. While this is still down versus 2019, it demonstrates strong continued improvement even in our seasonally weaker second quarter. For example, scheduled revenue per passenger declined 22% sequentially between the second quarter and the first quarter of 2019, while it only declined 3% this year in spite of 3.5% sequential growth in scheduled ASMs. Typically, we would fly fewer ASMs in Q2 than in Q1. TRASM for June was down only 4.9% versus June of 2019. Charter service revenue was $29 million for the quarter, which was approximately 31% lower than the second quarter of 2019. Charter block hours in the quarter were down 24% versus 2019, and charter revenue per block hour has only declined 8.6% in that same period. Charter revenues from ad hoc charter flying have recovered much faster and are only down 8% versus 2019, and we're expecting to add additional track charter flying later this year as that part of the business has taken a bit longer to recover. Cargo revenue was $22.1 million in the second quarter, consistent with our expectations. We started this line in Q2 of 2020, and it was fully ramped up in Q1 of 2021. Total operating expenses for the quarter decreased by 38% compared to the same period in 2019. If you exclude the special items and fuel from our results, total operating expenses were about flat in Q2 of 2021 versus Q2 of 2019. We're very pleased with this result as total block hours in the quarter were 11% higher in Q2 2021 than in Q2 of 2019. Of note, salaries, wages, and benefits were up 17%, and maintenance expense was up 84% versus 2019. The increase in salaries was driven by the 11% block hour increase and the insourcing of our ground operations at Minneapolis. Higher maintenance costs in Q2 2021 are due to the larger passenger fleet, the addition of the cargo business, which didn't exist in 2019, and the timing of certain heavy maintenance events. Aircraft rent expense dropped 36% last year, while depreciation expense increased 11% as we continue to prioritize owning our aircraft versus utilizing operating leases. Operating expense includes a net special items credit of $38.5 million, consisting primarily of $39.8 million from the CARES Act payroll support program, offset by certain one-time items related to the purchase of an aircraft that was previously under operating lease at Sun Country. Excluding these special items, we still had a positive adjusted operating income of $11.5 million and adjusted EBITDA of $28.8 million in the quarter. This will be the second consecutive quarter where we have positive adjusted operating margins, and we expect this trend to continue into the next quarter. The second quarter is also the third consecutive quarter where adjusted EBITDA margins have been north of 15%, as we produced over 19% this quarter. The company ended the second quarter with liquidity of $336 million, which consisted of $310.7 million in existing cash and equivalents and a $25 million undrawn revolver. During the quarter, we purchased our sixth aircraft off-lease using the same delayed draw term loan facility as we did for the last five aircraft. For all six aircraft, the total amount financed using this facility is $80.5 million. We only have six aircraft still under operating leases, while at the end of the second quarter of 2019, that number was 18. Our net debt has declined for the third consecutive quarter as we grew cash balances from operations, while total debt rose from $505 million to $519 million due to the addition of two finance leases to the balance sheet. We are actively in the market for 737NGs that fit our cost parameters, and we have seen a lot of aircraft coming available in the market in recent months at attractive terms. As a reminder, Sun Country has no committed aircraft book, and we're able to fund our growth with low-cost aircraft purchased opportunistically in the used market. Let me turn now to the outlook. We still see strong improvement in demand through the summer. Third-quarter total revenue is expected to be between $170 million and $175 million, which compares favorably to the $171 million that we produced in the third quarter of 2019. In addition to this, we're expecting to achieve an operating income margin between 5.5% and 9.5%, which would represent our third consecutive quarter of positive operating income. The midpoint of this range is also higher than the 6% operating margin that we produced in the third quarter of 2019. It's also worth noting that we are expecting to produce this level of higher operating income while assuming an average fuel price of $2.30 versus $2.07 that we saw last quarter. Total Q3 ASMs are expected to be 16% to 19% lower than they were in 2019, as we're still in the process of normalizing capacity for the current demand environment. With that, I will open it up to questions.

Thank you. First question, we have Catherine O'Brien from Goldman Sachs.

Hey, everyone. Thank you so much for the time.

Hi, Catherine.

Hi, Catherine.

Hey, guys. So, revenue came in quite a bit better than your forecast at the beginning of the quarter. We've heard from other carriers that demand picked up through the quarter. But can you just give us some color on what trended better for Sun Country? Is that fares, loads? Were there some standout regions? Thanks.

Sure. So, Grant Whitney is here, so I'll turn it over to him in just a second, but let me give you my comments. Beginning around mid-February was where we saw really a dramatic move in demand to the better. That continued all the way through June. As I mentioned in my prepared comments, we exceeded June 2019 TRASM, which is higher fares than a slightly lower load factor. The demand environment improved throughout the quarter on a flown basis relative to pre-pandemic comparisons. Across the network, we're seeing strength. Some of that can be explained through restarts of OA capacity in certain markets. But generally, the leisure markets continue to do well. We're seeing big city connectivity to Minneapolis perform really well. The only exceptions to a broadly strong picture can be explained through a delay in the infrastructure build-out in some of the destination markets that we serve that are relatively small. That means that travelers aren't able to get a hotel room or a rental car or go out to dinner. So generally, things look really good, and that is continuing in the trends that we're seeing for bookings going forward through October, which is the time period that we have a meaningful booking profile. Grant?

Yes. Jude, that's a great answer. Catherine, the only thing I'd add to that is, I think, as we saw through the quarter, we – the Southeast, particularly Florida, was really strong in April. And then as Jude mentioned, the coasts and the Mexican resort destinations really turned on in June, which speaks to the value of our business model, and then we can move the capacity that quickly. We were able to take advantage of it, and as things slowed down, we got out of them and moved into better things.

That's great. Thanks for the color. And then I guess, following on some comments you made last quarter. It sounds like you've been busy sourcing attractive aircraft in the secondary market. Can you just help us think through what the upper bounds of your acquisition targets might be just in terms of what you could smoothly add over the next 12 months from an operational and hiring standpoint? And I guess, I think you might have mentioned something about this in the prepared remarks, but would you consider buying aircraft today, just given the current market backdrop and then waiting to induct them when the operation could support them? Thank you so much.

Yes. So this is Dave. First of all, there's a lot of aircraft on the market, and we have gone through a lot of different bidding processes to yield the aircraft that we have brought on, which is three more so far this year, and we have a strong bead on many others, including some interesting multi-aircraft deals. We've said many times, I think that our passenger fleet plan target is 50 aircraft sometime late in 2023. I think operationally, probably the maximum we could handle would be an aircraft a month. I don't know if we could sustain that for two years, but it's an aircraft a month kind of thing at max. Operationally, we can bring in the aircraft that we need to meet our fleet plan. The answer to your second question is potentially yes. If there were some really attractive deals out there, particularly multi-aircraft opportunities or really economical aircraft opportunities, we probably would bring those in even if we didn't have an immediate need for them. One of the things we can always do is, given the strength of our model, we can bring an aircraft that we might not have a scheduled service need for in a particular month or quarter, but we can throw it into our ad hoc charter pool. As long as we get the pilots to resource it, we can use the aircraft to pick up some incremental charter revenue. We've talked about keeping our ownership costs low, which we do. So that helps us utilize these aircraft less than we otherwise would at periods where we don't have scheduled service opportunities for them.

One other quick point on asset value is that most of the value of the planes that we're transacting on are encompassed in the engines, and that's an appreciating asset along with OEM escalation. So there's not a lot of cost with the stockpiling.

Great. Thank you so much.

The next question, we have Hunter Keay with Wolfe Research.

Good morning.

Hey, Hunter.

Hey. So on Amazon, if they were to theoretically come to you and say, please take 10 more airplanes. Would you feel the need to go out and find 10 more passenger aircraft just to ensure that you stay balanced? Or would you just kind of let yourself get a little over-indexed to Amazon?

We would probably let ourselves get over-indexed temporarily. I mean, the optimal ratio for us is in between the 20% to 30% range. That's based on minimum guarantees to our crews so that we can build an optimal scheduled service seasonal airline. So if there's an opportunity to expand with Amazon, we would probably take it on and wait and see what happens. Our current plan is that there isn't anything on the horizon, and we're going to focus on building out our scheduled service to pre-pandemic level utilization levels of the fleet that we have. I think it's good flying, and if an opportunity presents itself, we'll evaluate it, but optimal is 75-25 for us, roughly.

Okay. Thanks, Jude. And then your loyalty program, what is your penetration of the Twin Cities area relative to your local origin market share?

Yes. So let me define loyalty. First is just active customers that we interact with through digital marketing. There are about 1 million. There are 4.5 million people, 90 minutes from the Twin Cities airport. We have 1 million households that we deal with, which is pretty high penetration. I'm not going to give you numbers on our credit card program, which we consider like the active loyalty members, other than that it's growing really rapidly. Keep in mind, we inherited a loyalty program that we trashed and rewrote when we got it. So the loyalty program at Sun Country is effectively three years old. We're still making some adjustments and tweaks and working to grow that program out.

And one of those years was a COVID year.

Okay.

The encouraging thing about our credit card program is that it's growing, and now that we're through COVID, we're seeing sign-ups back to the pace that we had in 2019, and spending is back. We can talk more about it as we get a full year out of COVID and kind of see what the steady state of that product looks like.

Okay. Thanks, guys.

We've also – sorry, Hunter, I'd only add that during COVID, we've made a strategic focus on making sure we're building out the Minneapolis network. So our market share in Minneapolis, we're really happy with how that's developed over the last 12 months.

Right. Okay. Thank you.

Thank you. And next question, we have the line of Mike Linenberg with Deutsche Bank.

Good morning, everyone. Two questions here. Hey Dave, as you think about your liquidity, which is actually quite high relative to your revenue base, I realize we're still sort of in the midst of a pandemic here. But as you think longer term, have you thought about what is the appropriate level? The fact that unlike most other carriers, you've got about a third of your revenue that is under long-term contract or longer in nature. You may not need to carry as much cash as your competitors. Where are you coming out on that?

That's a good question. Here's the dilemma with that. Given the way the model works, the fact that a big chunk of our business is under long-term contract or let's say heavily repeatable at least, we can probably operate, and we've demonstrated the ability to operate with a whole lot less capital than we have on the balance sheet right now. So there's no question about that. We have surplus cash on the balance sheet today. What the optimal number is something probably lower than that. Now the one caveat I would put in here is we've talked about a pretty aggressive growth plan. That means hiring, it means buying aircraft, it means going to airports, it means ground equipment, everything associated with that. We've said at the time of the IPO that, that's what we were going to use our capital for, and that is what we're going to use our capital for. I hesitate to throw out a precise number for the optimal amount of capital. If you're looking at a number of 20% to 30% of our total revenue, that seems, from my history in the industry, like a rough number, and we have more than that now.

Great. Okay, that's helpful. And then just a second question. You look through your list here of 11 new airports. I'm curious, I'm going to focus in on Punta Gorda and Asheville. I'm curious about how much work you had done in advance before announcing those – or was that more of a reaction to a competitor flying to many of those markets? I suspect that at the end of the day, you're going to do everything you can to defend that market. So just curious on kind of market selection and the response there. Were those markets that you had been planning for some time? Or was that more of a reactionary move? Whatever you can – any color on that would be great. Thanks.

West Palm is a reentry. In West Florida, along the coast, we want to be there for Minnesotans to go to every single destination across the West Coast. I think that kind of answers your question, Mike. I mean it's our home market. We aim to be the choice carrier for everybody in the Twin Cities that pays with their own money as distinct from Delta's customers, and we're going to defend this market aggressively.

Okay. Fair enough. Thanks.

Thank you. Next question we have Chris Stathoulopoulos with Susquehanna International.

Hey. Good morning, everyone, and thanks for taking my question. In your prepared remarks, you mentioned the resiliency of your margins through the cycle, given your unique operating model in that business. I realize that your business is a lot different today than it was a few years ago. But could you help us frame what margins might look like through a few cycles with the current business line that you have? Thanks.

I don't think we want to get into a lot of forward-looking multi-year margin guidance. I think the point was that given the stability of our cargo business, given the high degree of repeatability of our charter business, we can work through cycles on the passenger-scheduled service side and still maintain above-average levels of profitability for the industry. I hesitate to give out exactly what those long-term margins would be, but I think we're very confident that they would be in excess of the margins that could be generated by carriers who rely almost exclusively on the scheduled passenger business.

Okay. Thank you. And as a follow-up, just curious about your utilization levels with Amazon as more people return to office and perhaps there's less online ordering for home. Curious if you're seeing any change in volumes in utilization there? Thank you.

No. It's very consistent. Our expectation is that continues into the future. What you saw in the second quarter should be steady state for the future.

Thanks for the time.

All right. Thanks, everyone. Thanks for your interest in Sun Country. Have a good day, everybody.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.