Welcome to the Sun Country Airlines Second Quarter 2023 Earnings Call. My name is Josh, 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'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to 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 began, 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 based upon management's current beliefs, expectations, 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 our most recent SEC filings. We assume no obligation to update any forward-looking statement. You can find our second quarter earnings press release on the Investor Relations portion at ir.suncountry.com. With that said, I'd like to turn the call over to Jude.

Thank you, Chris. Good morning, everyone. Our diversified business model is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible schedule service capacity in the industry. The combination of our schedule 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 industry-leading profitability throughout all cycles. We crossed a few milestones since our last call that I wanted to highlight. First, Sun Country surpassed $1 billion in revenue for the 12 months ending in June, the first for our 40-year-old company. In Q2, we carried over a million scheduled service passengers for the first time in any quarter. We regained our position as the top margin carrier among the 11 carriers for the 12 months ending in the second quarter. Recall that we were the first into this pilot contract cycle. In July, we executed a record number of flights in a day—the ability to deliver quality operations during peak days is a key priority for us as we execute our variable capacity model. This growth and performance is a testament to all our frontline employees who deliver for our customers every day. Consistent with the theme of the last several calls, we've remained in an environment where demand across all our segments is strong. As it's been a common topic around the industry, I wanted to give some color on the revenue environment for our scheduled business. Our second quarter scheduled service TRASM was up 10% year on year on ASM growth of 6%—certainly very positive results. We expect to be able to accelerate scheduled service ASM growth into the third quarter to mid-teens, and we expect TRASM to be down slightly year on year. However, I want to point out that scheduled service TRASM for 2019 was up in Q1 and Q2 by 34% and 43%, respectively. We expect Q3 to fall between those bounds. So we're seeing unit revenue stabilized at a substantially higher level versus pre-COVID levels. This reset seems to be persistent based on sales into our selling schedule currently out through April 2024. Minneapolis, by far our largest market, has been particularly robust through the COVID recovery. This summer, we launched 15 new markets, all are performing well. Since I've been in Sun Country, we haven't had any MSP markets that didn't have a positive contribution. That's pretty amazing. One thing I'd like to call out is future cash flow. This year, we will produce about 50% more flights than were performed in 2019. In two years, I expect departures to grow versus this year by over 30%. We can produce those growth figures with the addition of only three net aircraft to the fleet at about a $60 million cost, along with the redelivery of our 900s currently leased out. All three of the expected deliveries already have committed financing. So this free cash flow gives us the confidence to execute on the share buyback recently approved by our board. And with that, I'll turn it over to Dave.

Thanks, Jude. Q2 was a historically strong quarter for Sun Country, despite it being among the seasonally weaker quarters for our business. Total revenue increased 19.2% year-over-year to $261.1 million, while earnings before taxes were $26.8 million, versus a loss of $4.8 million in Q2 of 2022. Adjusted operating margin was 15.3% for the quarter. Revenue, earnings, and margin results were historically record highs for the second quarter. Revenue from our passenger business continued to stay strong in Q2, increasing 16.6% year-over-year to $227.9 million. Scheduled service plus ancillary sales generated $178.2 million in revenue, which was 16.8% higher than last year. This easily exceeded a 5.6% growth in scheduled service ASMs, which was driven by a 2.7% growth in total fare to $177 and a 2-point increase in load factor to 85.8%. Scheduled service TRASM grew 10.3% versus Q2 of last year. Since the second quarter of last year, we've seen a significant sustained increase in our scheduled service TRASM versus pre-COVID levels. We believe this is driven by the continued optimization of our network and changes in the public's demand for leisure travel. As Jude mentioned, during Q2, our scheduled service TRASM was 43% versus 2019, and in Q3 of this year, we expect scheduled service TRASM to be up at least 35% versus Q3 of '19. We don't see any sign of scheduled service TRASM numbers returning to pre-COVID levels; rather, they appear to be stabilizing at the higher levels we're now experiencing. Charter revenue in the second quarter grew by 16.1% to $49.6 million, while block hour growth was up 23.9%. A portion of our charter revenue consists of reimbursement from customers for changes in fuel prices as we do not take fuel risk on our charter flying. Q2 fuel prices dropped by over 38% versus last year. If you exclude the fuel reimbursement revenue from both Q2 of '23 and Q2 of '22, charter revenue grew 33.6% over the period and charter revenue per block hour grew by 8%. Program charter flying was 87% of total charter block hours versus 92% in Q2 of last year. We'll continue to pursue more ad-hoc businesses as available capacity increases. Second quarter cargo revenue grew 18.1% to $25 million on a 10.4% increase in block hours. Last year we had lower levels of flying due to scheduled maintenance events, and the annual increases in our Amazon contract occurred in December of 2022. We expect year-over-year aggregate growth to peak in Q3 and moderate thereafter. We're expecting full year 2023 block hour growth to be in the high-single-digit range. As always, our unique model allows us to move capacity between lines of business as conditions allow. Now let me turn now to cost. Total operating expenses increased 4.5% on an 11.3% increase in total block hours for the second quarter. Adjusted CASM was up 10.4% versus Q2 of '22. This compares to a 14% increase in the year-over-year comparison for Q1. We expect year-over-year CASM growth to continue to moderate in the quarters ahead. Daily aircraft utilization was still 9.5% lower year-over-year, which continues to put pressure on unit costs. Total non-fuel operating costs increased by approximately 25% versus Q2 of last year. Significant drivers of this increase include the aircraft ownership costs for the five 737-900s we currently lease to Oman Air, as well as non-repeating costs for the vesting of management stock options, and a payment to one of our labor groups to settle past grievances. Excluding these expenses, non-fuel operating costs would have increased by 19.8% year-over-year. Fuel expense decreased 32% versus last year. Regarding our balance sheet, our total liquidity at the end of Q2 was $263 million, which was slightly higher than the amount at the end of Q1. Year-to-date, through July, we spent $210 million on CapEx, which funded a majority of our planned aircraft growth into 2025. We expect to achieve our growth objectives over the next two years with higher aircraft utilization and the addition of only three net aircraft. As a result, we're expecting CapEx to decline considerably in '24 and '25. Our net debt to adjusted EBITDA ratio at the end of Q2 was 2.3. Since we do not have a significant debt burden, we have flexibility in how we deploy our cash. Since Q4 of last year, we spent $47.3 million on share repurchases. Our board has authorized another $30 million in repurchase authority, which brings our current available share repurchase authority to $32.8 million. Turning now to guidance, we're anticipating Q3 total revenue to be between $240 million and $250 million, an increase of 8% to 13% versus Q2 of '22 on a block hour increase in 13% to 16%. We're forecasting a $2.90 per gallon fuel price in the quarter. Operating margin for the quarter is forecasted to be between 6% and 11%. 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. And with that, we will open it up for questions.

Thank you. Our first question comes from Duane Pfennigwerth with Evercore ISI. You may proceed.

Hey, good morning. Just on charter, can you talk a little bit and remind us how fuel changes year-over-year impact revenue trends in charter and also margins in charter?

So I think it's important to break out what charter includes. There are several tracked programs; we have a fleet of 60 aircraft, five of them are dedicated to track programs plus the VIP. So it's basically six aircraft. And those have absolutely passed through in fuel. We have a significant amount of ad hoc business that is predominantly sports programs. Again, that's 100% pass through. Sometimes, however, we need to position aircraft at our costs. So there's a little bit of flying that we do in support of those that has fuel at risk. And then there's the military business, which is 100% pass through. So it's effectively over 90% perfect pass through.

Yeah, I mean, think of it this way, Duane. So we negotiated a charter contract, and that charter contract has a reference price. If fuel is higher or lower than that reference price, we get reimbursed from the charter customer for either more or less based on the fuel price. When fuel is really high, the reimbursement is higher, so the revenue looks higher. When fuel is really low, the reimbursement is less, so the revenue looks less.

Got it. And then for some of the seasonal flying that you do, can you just remind us to what extent Mexico or Cancun is a part of that seasonal set? Obviously, we heard some more cautious comments on Cancun, specifically from Spirit yesterday, but could you just kind of comment on your trends to maybe Mexico and the near Caribbean?

Yeah. I'll give you some backdrop. Our international network is focused from Minneapolis in the wintertime. In the summertime, the predominance of our international network is focused on origination in southern large markets. The distinction there is that the southern business is largely a scraping business where we don't support that flying with a lot of marketing. We're not focused on building a brand in some of these origination markets, in contrast to what we do out of Minneapolis in the wintertime. Therefore, we're a little more subject in the summertime to the prevailing airfare in some of these international markets. I would agree with Dave's comments about some of the weakness that we're seeing in southern markets, but these are still highly profitable markets for us. We have the ability to dial capacity to whatever optimal level is supported by the fare environment at that given time. Most of our international markets in the summertime are now winding down, and we'll be out of by the end of August. Then we'll focus on building up our largely Minneapolis but also some Milwaukee and a few others where we fly winter markets as we approach the fourth quarter.

Yeah, just echoed Jude's comments that there was a little pressure this year. But the results were acceptable for us on an absolute basis, although down from maybe what we've exceeded. But we do some unique things down there. There's one market that has been particularly strong for us, which is Harlingen, which did not have the competitive impacts. That one performed very nicely. So to Jude's point, our agility will make it work. We've been there for a while, and it's going to be something we continue to do in the summer.

My diagnosis is Cancun, because it was a really strong summer in '22, and a lot of carriers chased that demand into this summer. If you look at capacity levels year on year, Cancun was the beneficiary of a lot of capacity growth that drove down fares. I think there's still strong structural demand. We can, as I mentioned, fly in any environment and be successful.

Okay, makes sense. I'm going to have to look up that originating market that you talked about; I'm going to go look at my map. But, I appreciate the thoughts.

Thank you. One moment for questions. Our next question comes from Catherine O'Brien from Goldman Sachs. You may proceed.

Hey. Good morning, everyone. Thanks so much for the time. Another topic that's been popular this earnings season is domestic carriers having to right-size day a week, just based on their current view on where corporate now sits? Not that it's a market use case, but I know your network has less overlap with some of these carriers. But have you started to see any pickup in competitive capacity into the fall or early winter as these changes take place in other airline schedules?

Generally, our capacity environment is constructive, meaning that there is a lot of growth. We are seeing some build-backs into Minneapolis based on 2019 levels, stuff that was coming back from non-Delta carriers. However, that's perfectly fine. On the day-a-week stuff, I mean, this is sort of what we do, and I don't think it should be a surprise to anybody that Vegas is a little weaker on Tuesdays than it is on weekend demand patterns. So, we built the business around that—it's not a substantial change. Here's a point that I can bring up, which is perhaps out of consensus. July doesn't have a lot of day-week sensitivity; there's tremendous demand, but it's elastic. In contrast to March, which has these fantastic days. So, there's really deep demand that's inelastic on a few given days, particularly around spring break travel patterns. July, we need to be a lot bigger than we were, and that means adding into off-peak periods. We have a capacity constraint; that's a block hour constraint based on pilot availability. We choose to put our flying on the very best of days during that month. However, if we had more flying, we would expand and flatten the schedule, with a relatively moderate or de minimis even reduction in unit revenues because the off-peak days are so powerful. In contrast, September is completely different, and as it always has been—there's just not a lot of midweek opportunities in September. I agree with the overall sentiment that there is a focus, a renewed focus perhaps, from the Big Three on leisure demand, which is crowding out somewhat leisure carriers when there is limited demand. But we've focused on flying around those limited demand periods, and for us, it's really about adding into off-peak periods during peak months. It's a more nuanced and complicated matter than the market is making sense of it at this point. Our opportunity is to grow into these 40% variable contribution scheduled service networks that we have during peak months, and that's what gets our third-quarter margins up into the mid-teens from where they are today at this fuel price.

Got it. That's really helpful, thanks for the perspective. Maybe just two quick ones on cost for Dave. So you're just coming back to the CASM commentary through your end that eases. Can you just give us some more color on if that's ratable—like what's a step down in each quarter or anything we should be aware of in 4Q capacity growth? And then just on the share-based comp, in the press release, you noted it was a one-off in stock compensation, but Q1 wasn't too far below this quarter, both relevant elevate last year. Can you just give us some color on how we should expect that to trend just outside of your commentary on CASM?

Yeah, sure. Essentially, I think what this is consistent with Jude's commentary is we're a little bit oversized. We mentioned on the aircraft front that we have enough aircraft; we add two more to really sustain reasonable growth levels through 2025. So we're a little oversized, and as we continue—and that’s negatively impacting CASM. As we roll forward into the quarters ahead, you see some of this growth—particularly like some of the third-quarter growth, and then some growth going out into the fourth quarter as well. Those year-over-year numbers will continue to moderate. So we should be single-digit kind of stuff in the third and fourth quarters. I'm not giving guidance just yet, but we should just think continuously improving year-over-year trends here on the CASM front. Regarding the management options, there were a number of folks here who had considerable options from Apollo when the original acquisition was made. Apollo's ownership, which I think is an important point for investors, has continued to drop and is now sub-30% at the company. This overhang is getting less and less, but that 30% was sort of a trigger for the vesting of management options that happened last quarter. So when we fell below that number, a significant number of management options vested. So those original options are now fully vested. So vesting costs will not continue to recur in the quarters ahead, at least for those options. So that number will moderate.

Okay, great. Thanks so much, Dave.

Thank you. One moment for questions. Our next question comes from Helane Becker with TD Cowen. You may proceed.

Hi, thanks very much. This is Tom Fitzgerald on for Helane. My question is just on what you're seeing in terms of pilot attrition and how you're feeling about getting first officers to upgrade into the captain seat? I appreciate any color you could have. Thanks very much.

I'll make some very general comments and then Greg, if you want to jump in. Well, we don't have any problem hiring pilots, and our attrition is consistently below where we had expected it would be at this time. The issue boils down really to getting pilots to upgrade to captains. So we're constrained in the left seat, and we continue to make strides in improving that figure. We will grow as we upgrade captains.

Yeah, I mean, to Jude's point, we don't have a problem hiring pilots right now. We've got really robust applications. We've got a great recruiting team. On the attrition front, we watch that daily; that has stayed within our expectations. We see these other deals that are going on out there now that might affect that attrition. However, we believe we can moderate that with additional hires that we can fill. As Jude said, it really does come down to our ability to grow at the rate of our captain upgrades.

This is an industry-wide issue, as the Big Three did a bunch of early retirements, and so everybody is trying to get pilots through their training pipeline, and rightsizing their pilot groups is taking a little time.

Yeah, I think one of the points—as you know, we've talked about this point for now a number of quarters. This continues to be a challenge for us, but you can look at the growth that we're looking at here in the third quarter as a testament to the fact that we are making progress, but it's not linear; it's bumpy, and this is the focus.

Thank you. One moment for questions. Our next question comes from Mike Linenberg with Deutsche Bank. You may proceed.

Hey, good morning, everyone. I did get on a few minutes late, and I apologize if you may have addressed this. But just going from a 15% operating margin, you're guiding 6% to 11%. We're coming off of what was one of your seasonally weaker quarters. What are sort of the primary drivers there? Is it things like fuel? I know September is a tough month for you guys. Can you just run through some of the puts and takes you're thinking behind that decline in profitability? Thanks.

The main thing is segmented capacity allocation. We have very consistent profitability from our track and cargo programs. It’s a good thing that they—in many ways, they’re flat in capacity. Then we have scheduled service, which is variable. As I mentioned, in July, one of the strongest demand months of the year, we are flying our airplanes at about eight hours a day, and that number should be 10 to 11. Those are 40% incremental margin opportunities that we're cutting out because of capacity constraints that don't have anything to do with opportunity or airplanes; it's really about staffing. That's the biggest thing. In contrast, the second quarter is relatively flat demand period as compared to the third quarter. The way the third quarter goes in July, in contrast, the second quarter has a really good April, a really good June. May is not great, but it's not that bad. It's not as bad as September. So it's a lot more flat, and that's the difference in the two quarters.

Makes sense. Jude, did you mention what your scheduled ASMs will be up in the September quarter?

We didn't mention that. I don't think we have an issue sharing it. I just don't have it in front of me.

I got it; it's about mid-teens.

Okay, mid-teens, okay. And then just my last question, and this is more of a modeling question. As we think about the rental revenue, the $6 million, is that sort of the right quarterly run-rate? And when does that start to fade out? What is it, sometime late '24-'25? Thanks for taking my questions.

Yeah, that's right. The fade-out will begin really in November 2024 and then continue through November 2025 as the five aircraft roll off and come to us to operate.

Okay. Thank you.

Thank you. One moment for questions. Our next question comes from Christopher Stathoulopoulos with Susquehanna Investment Group. You may proceed.

Good morning, everyone. Just want to get back to the comment you made on, I believe you said that the stock compensation should be moderating given the changes in the vesting schedule. So, could you help frame the implied operating income for Q3? How should we think about stock comp there? I believe this quarter was a little north of 15%, that's a significant step up from recent quarters. I just want to better understand how we should think about that underlying as we think about the second half of the year? Thank you.

Yeah. I don't have that precise number in front of me; it will just be a significant step down. In the second quarter, there was a significant chunk of options that had not yet vested; they all vested in one quarter. So there'll be a step-down number. I just don't have that in front of me. As it pertains to the 2018 option grant associated with the Apollo transaction, all those options are either vested or done, so that goes to zero. Yeah, so exactly, that number goes to zero and as with any other company, we have an RSU program, which is ongoing, so there will be some stock comp expense that continues, just at a significantly lower level.

Okay. The second question. So I think you're backing out the DNA associated with these five dry leases from your CASMx. Could you just walk us through the rationale why, I'm guessing because they don't have associated ASMs? But you're including the revenue side of it. And then also as those come off, I think you said dry lease in 2025. Could you just kind of walk us through how we should think about the unit cost impact or unit margin? Just want to kind of better understand this relationship here that's sitting in revenue here, but it looks like it's coming out of your CASM. Thanks.

Yeah. I mean, it's sitting in revenue and it's sitting in expense in our financials. But since—as you pointed out, it doesn't generate any ASMs, we take it out of the CASM comp and out of the TRASM comp. So it's out of unit costs on the revenue side and on the cost side, in the same way that our cargo revenue wasn't in our cost per ASM or revenue per ASM number that generated ASM.

Just strategically, I want to just reiterate from last quarter. We are not being a lessor; we are just acquiring airplanes for future delivery. So when we report, we are doing our best to back out all those results so that you can kind of see the underlying success of the business, which is what we care about.

Okay. And then follow on one more—yeah, I'm sorry, go ahead.

No, I just want to follow up quickly; I just pulled the numbers. So stock comp in the second quarter I think is around 4.5%; that number will probably drop to $1 million plus or minus.

For Q3, or for the second half or?

No, for Q3.

Okay, great, thanks.

So we've heard from U.S. peers talking about how the strong international travel is pulling from a pool of what would be domestic travelers, and are you seeing any of that? And if so, what are your thoughts on when that might slow? Thank you.

I mean, my view is that we observe something and then try to make up a reason why it exists. It's true that the transatlantic yields are much higher than they had been. However, I think it's a stretch to say that those folks flying transatlantic would have otherwise flown domestic. I think more confidently we can say summer of '22 was an outlier in demand recovery with a lot of recapture from the previous years. Instead, we're going down to a fairly consistent year-over-year unit revenue environment month-by-month where improvements are between 35% and 45%. That seems consistent going into all the bookings we're seeing through spring of next year. I think it's a little much to draw that conclusion, but I think what gets me excited is just it looks like fares have sort of permanently reset into a post-COVID environment for our network anyway. Anything else, Grant?

I would just add to that that those unit revenues versus '19, I think we're at the high end of that. So that's specific to us and a testament to the good job this team has done. I also think Jude's comments are spot on. If you look at our network, we grew—Jude mentioned 15 new markets this summer. They've all met expectations. Our load factors are up. So we saw strong demand across our network, and we're really happy with the results.

Okay, thank you.

Thank you. I'd now like to turn the call back over to Jude Bricker for any closing remarks.

Thanks for joining us. Thanks for your interest in Sun Country, and we'll talk to you again at the end of the next quarter. Good morning, everybody.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.