Good day and thank you for standing by. Welcome to the Sun Country Airlines' Fourth Quarter 2023 Earnings 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. I would now like to hand the conference over to your speaker today, Christopher Allen, Director of Investor Relations. Please go ahead.

Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer, and Dave Davis, President and Chief Financial Officer, along with a group of others to 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 that 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 and our most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our fourth quarter and full year 2023 earnings press release on our website at ir.suncountry.com. With that said, I'd like to now turn the call over to Jude.

Thanks, Chris. Good morning everyone. Thanks for joining us today. 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 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'll be able to reliably deliver industry-leading profitability throughout all cycles. We have much to be proud of in the way we finished 2023. Many of the challenges of the post-COVID period are fading as we move into 2024. Our operations in the third quarter showed significant year-on-year improvement across every major operating metric, including completion factor and other key indicators. For completion factor, we only canceled one scheduled service flight during the entire quarter. A14 increased 13 percentage points year-on-year without an increase in target block times. In the fourth quarter, we produced a declining year-on-year CASMex for the first time since COVID. One of the main contributors to our improving cost and operational performance is that we've been able to staff the airline closer to optimal. In fact, we've seen better staffing metrics across every major labor group. Improved staffing has allowed us to allocate additional peak capacity in scheduled service and to take advantage of close-in charter demand. Maintaining peak schedule allocations has allowed us to fly almost 15% more ASMs in the fourth quarter, with adjusted TRASM declining only 8%. We continue to operate in a strong demand environment across all three segments of our business, with scheduled service continuing to receive the majority of our growth capacity, a trend we expect to continue into 2024. Congratulations to the entire Sun Country team that delivered record full year 2023 revenue, full year passenger volume, and full year operating margin. I wanted to highlight a few things that I'm excited about in 2024. I feel like we have good control over our unit costs. While we will continue to face headwinds, particularly with the heavy check cycle of our fleet, we should be able to continue to lead the industry in cost trends going into 2024. Demand is holding up really well. For the first quarter, we faced challenging comparisons as we lapped the exceptional yield environment of winter 2022-2023. For the first quarter, we are currently scheduled to fly over 15% more ASMs than the prior year, with only an expected mid-single-digit decline in unit revenues. These positive revenue trends are mostly a result of growth being heavily weighted to peak periods due to lessening staffing constraints. A few examples: in December 2023, we flew 120% more ASMs in scheduled service during the last 14 days of the month compared to the first 14 days, while industry capacity shifted about 3%. In the first quarter of 2024, March will have about 60% more scheduled service ASMs than January, compared to 47% in the first quarter of 2023. This schedule variability, along with our cost structure, serves as the moat around our business and is made possible by our multi-segment model. On the fleet side, we have three aircraft in various stages of delivery. These aircraft will be part of our controlled fleet of 63 airplanes by the end of the second quarter. We expect to be able to grow ASMs by around 40% versus 2023 levels, aided by lease returns, utilization increases, and up-gauging in addition to these new airplanes. That should give us two to three years of growth while simultaneously producing exceptional free cash flow yields. That combination rarely happens in our industry. We have many projects that should help us keep momentum on operational costs and revenue trends into 2024. To highlight a few: in 2024, we were able to rebid our credit card agreement, which we expect to result in materially better economics. In 2023, we launched bag scanning technology that has had a material impact on MBR. That solution will be rolled out to our outstations in the coming months. We automated our passenger reaccommodation process, which allows us to take more scheduled service risk during peak periods. We’ll launch our app in a few months. Our crew rostering system will transition to PBS later this year, and all the investments we've made in crew training are starting to pay off with the lowest training footprints we've seen since COVID. Finally, our growth brands have very little risk. We have high confidence in our Minneapolis expansion based on prior success. Further, based on ongoing discussions with charter and cargo customers, I expect those segments to keep pace with our scheduled service opportunity. And with that, I'll turn it over to Dave.

Thanks, Jude. We're pleased to report strong fourth quarter results, including an adjusted operating margin of 7.4%, which was well ahead of our guidance. Both our quarterly and full year 2023 results again demonstrate the resiliency and earnings power of our unique diversified business model. 2023 was the third consecutive year of profitability for Sun Country, and on an adjusted net income basis, with one exception, we've been profitable in every full quarter since going public in March of 2021. We believe we finished the year with the highest or among the highest adjusted pre-tax margins in the industry at 9.9%. This result was very similar to 2019, despite fuel prices being 38% higher this year. It's important to understand that our operating model is almost the opposite of the high utilization carriers. Our passenger business flies when demand and unit revenues are highest, and we fly much less during off-peak periods. The modest increase in unit costs that this produces is more than offset by the resulting improvements in unit revenue. Additionally, our diversification across scheduled service, charter, and cargo operations leads to resiliency through business cycles. Our strong 2023 results allowed us to return $68.6 million to shareholders in the form of share repurchases. Since 2022, our share repurchases have totaled $93.6 million. I'll turn now to the specifics of our fourth quarter and full year results. First, revenue and capacity. In the fourth quarter, total revenue grew 8.1% versus the fourth quarter of 2022 to $245.5 million. Scheduled service revenue plus ancillary services grew 4.6% to $163.8 million. Scheduled service TRASM decreased 9.1% to $0.1073 as scheduled ASMs grew by almost 15%. For the full year, total block hours increased by 9.8% versus 2022, and our total revenue was $1.05 billion, which was 17.3% higher than the prior year. 2023 scheduled service plus ancillary revenue grew 15.7% to $730 million. Full year scheduled service TRASM increased 7.6% and scheduled ASMs increased by 7.2%. Looking forward to the first quarter of 2024, we anticipate scheduled service ASMs to grow approximately 15% versus the first quarter of 2023, with scheduled service plus ancillary revenue growth expected to outpace the 4.6% year-over-year growth we saw in the fourth quarter. Charter revenue in the fourth quarter grew 8.8% to $46.9 million on block hour growth of 7.8%. 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. Fourth quarter fuel prices dropped by 14% year-over-year. If you exclude the fuel reimbursement revenue from both the fourth quarter of 2023 and the fourth quarter of 2022, charter flying revenue grew 11.1% during the period, easily exceeding block hour growth and producing a 3.1% increase in charter revenue per block hour versus last year. For the full year, charter revenue totaled $190.1 million, 17.6% higher than the full year of 2022. Charter revenue under long-term contracts represented 80% of the total charter block hours as contracted charter flying grew 25.7% versus 2022. Fourth quarter cargo revenue grew 3.6% to $25.3 million on a 1.8% increase in block hours. For 2023, cargo revenue grew 10.4% to $99.7 million on a 5.8% increase in block hours. As you can see, we are continuing to grow at a profitable, measured pace. In the first quarter of 2024, total block hours are expected to grow between 8% and 11%, while total revenue should be between $310 million and $320 million. Turning now to costs. Fourth quarter total operating expenses increased 7.7% on a 10.4% increase in total block hours. Adjusted CASM declined by 2.2% versus the fourth quarter of 2022. During the quarter, we saw solid cost control across the company. As our pilot availability issues have eased, we've been able to achieve our growth plans, and we're benefiting from the operating leverage in the business. Importantly, more pilot availability means fewer hours paid at premium rates and lower unit costs. For the full year, total operating expenses increased 9.9%, in line with total block hour growth of 9.8%. Full year adjusted CASM increased 6.4% to $0.075, with increases in the first half of the year driving this increase. Regarding our balance sheet. Our total liquidity at the end of the fourth quarter was $205 million, which reflects $13.5 million in share repurchases during the quarter. As of January 31, our total liquidity was $234 million. In 2023, we spent $218 million on CapEx, almost $200 million of which was for aircraft and engines. We expect these aircraft to provide the bulk of the passenger lift we need through 2025. As such, we anticipate our full year 2024 CapEx to be approximately $100 million and our 2024 year ending in-service passenger fleet count to be 44 aircraft. In addition to these aircraft, we expect to have three aircraft being inducted into our fleet and four aircraft on lease to other carriers, which we expect to redeliver to Sun Country throughout 2025. We anticipate strong free cash flow generation in 2024. We continue to maintain a very strong balance sheet. Our net debt to adjusted EBITDA ratio at the end of 2023 was 2.2 times, down from 2.7 times at the end of 2022. Since we do not have a significant debt burden, we have flexibility in how we deploy our cash. Turning to guidance, we expect full quarter total revenue to be between $310 million to $320 million with block hour growth of 8% to 11%. We're anticipating our cost per gallon for fuel to be $3 and for us to achieve an operating margin between 17% and 21%. 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, we'll open it for questions.

Thank you. One moment for our first question. The first question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

Hey, good morning. Thank you. Just on the improved utilization, your ability to flex back up again in the peaks, which segment would you say is most constrained? Or maybe asked differently, how would you characterize margins or margin opportunity across the three segments?

Scheduled service is by far the highest margin and most affected by staffing constraints. Think of it like an S curve or a sine wave. If we have staffing constraints, they push the peaks down because we can only produce a certain amount of block hours in any given period. Monthly is typically the constraint, which yields significant opportunity costs during peak periods. That constraint is becoming less of an issue as we appropriately staff the airline.

That's helpful. And so the percentages that you put out there for March versus January, is that optimal? Or do you think as we roll through the year, there's even more peak capture you could realize?

The latter—there's definitely more opportunity in March. A good comparison would be to look back at utilization in 2019 when we weren't constrained. There's still about two hours per aircraft per day of production that we aren't able to achieve in 2024 versus 2019. The fleet is older now than it was then, and there are different dynamics relating to congestion in airports and things like that. We may not achieve what we achieved previously, but there's plenty of opportunity for incremental flying. Importantly, as we add more flying, it's coming mid-week in March, but compared to the average yield for the quarter, it's still above average, meaning we're increasing volume and unit revenues by growing peak period capacity.

That makes sense. And then just for my follow-up, is there any way to frame the premium pay over time that you incurred in 2023 that you feel like you won't incur going forward? Any way to size that order of magnitude?

I'm not sure I can give you an order of magnitude. I'd just say that this is what our current outlook is going forward. There's a minimum level of premium pay due to our contractual obligations in any given month. We'll need to pay that in 2024, just like we did in 2023 and 2022. For now, we only have two months scheduled at higher levels of premium pay in 2024 than the minimum amounts. I'll just say that the overall staffing situation has significantly improved. We've discussed several initiatives to improve the availability of our pilots, particularly captains. Those are bearing fruit, and we're seeing the growth needed along with favorable attrition levels. Premium pay is sort of where it needs to be, as well as our levels of upgrade and attrition. We could use more as there's more opportunity for growth, but we are seeing steady progress.

Okay. Nice to see you come through. Appreciate the time.

Thanks, Duane.

Thank you for your question. Our next question comes from the line of Catherine O'Brien with Goldman Sachs. Your line is now open.

Hey, good morning, everyone. Thanks for the time.

Hey, Cathy.

I was just hoping to get some high-level insights on 2024. How should we think about scheduled capacity growth through the rest of the year, or just capacity growth overall following that 15% growth in First Quarter, especially considering that you already have aircraft secured and it seems that pilot availability is improving significantly? On the cost side, I did some quick math and it looks like to get to the midpoint of your operating margin guidance, I'm seeing that cost ex-fuel on a block hour basis would need to rise about 4%. Is that the right level to think about through the year, or should we expect to see efficiency build? Additionally, I know you made the comment that you think you'll lead the industry on a CASMx basis. I wasn't sure if that was a cost gap comment or year-over-year performance. I know there are a few questions there, but thank you.

Let me start with the cost question for next year. I don't have the block hour numbers off the top of my head, but let me give you just some CASM indicators, which I think are probably very similar to block hour. On the CASM front, I think what we're expecting now is for CASM to basically be flat to up low single digits. The rationale is that we have a program underway to accelerate some maintenance spending into 2024, which will result in a modest bump to CASM, but pay significant dividends in 2025 and 2026 in terms of reduced unit costs by bringing more activities forward. So that's going to create a small cost bump. But right now, looking forward, we're seeing, like I said, flat to low single-digit CASM growth.

And my comment about relative CASM performance was mainly to point out that we're not subject to the major challenges, particularly on the fleet side, that the rest of the industry is dealing with. We don't have the Turbofan. We're not encountering new aircraft delivery delays. We don’t expect to perform any engine restorations or deal with OEM escalation in 2024. Our costs don't face as much pressure compared to the industry. I believe we'll continue to produce better trends in relation to our peers, maybe not on an absolute basis. Regarding your question about capacity growth, generally, we would consider mid-teen block hour growth, with most of that allocated to scheduled service.

Got it. Super helpful. A lot of your competitors have mentioned stronger domestic trends as capacity has decreased. I know your model is more resilient to overcapacity in downturns, which have been some of the toughest periods for the industry. But has this affected pricing in peak times where you increase flying? Any early reads on spring break or summer that you find encouraging? Thanks for the time.

Yes. As I mentioned in my comments, spring break last year was spectacular and probably not repeatable. We've seen a bit of settling in line with comments from other carriers concerning the Mexican Caribbean markets. This year, however, we're expecting substantial TRASM premiums to pre-COVID levels, consistent with comments from previous quarters. The domestic market is performing really well. We're seeing a rebound in Florida, which is crucial for us. As we address last year’s challenges in West Florida, things are looking very positive, consistent with other carriers' statements. Dave, anything further?

No. That's absolutely the case. The airline is successfully managing a 20% capacity growth in March, demonstrating the strength of the brand we've built in Minneapolis. We continue to work very hard to be the leading leisure airline in that market, and our results reflect that commitment. We aim to compete aggressively for that title going forward.

Great. Thanks for the time.

Thank you. One moment for our next question, please. Next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is now open.

Good morning everyone. This is Catherine on behalf of Ravi. Thank you for taking my question. I was just curious about something you mentioned earlier: as the floor of CASM across the industry is expected to potentially push RASM up, I was wondering if that helps you take price or market share in that scenario.

Yes. Generally, yes, but the factors that make us less susceptible to capacity effects also reduce our exposure to unexpected groundings of the GTF fleet, for instance. For good and for bad, we’re just not as connected to industry changes. However, capacity exiting the market has a net positive impact. We might only be a secondary or tertiary effect of reallocating capacity to replenish some network capacity from a reduced capacity airline, but it’s not material.

Got it. As a quick follow-up, I know close-in bookings across the industry were strong in last year and even probably in 2021 but seem to have dropped off in 2023. What does that look like now? And what’s your outlook on close-in bookings for Sun Country?

Close-in bookings remain very strong. The shape of the booking curve, which captures aggregate bookings at any given time, is quite similar to pre-COVID levels but at a higher fare. So, we expect that future trends will mirror those of the past, and we see positive indications in passenger behavior.

No.

Good.

Thank you.

Thank you. One moment for our next question, please. Next question comes from the line of Mike Linenberg with Deutsche Bank. One moment please for your question.

Can you guys hear me?

I got you now. Now we can.

Sorry. I just have a follow-up. I have two questions here, but one follow-up on Duane's question where you've talked about really being able to take advantage of marginal opportunities here. In the past, you've characterized that as being able to enhance your ability to operate at a 40% incremental operating margin as you better utilize your asset base. You did mention that you're still off about two hours from where you could have been or were back in 2019. Is that incremental opportunity still in the 40% range or so? Is that how we should think about it?

Yes. So, what we're referencing is not an operating margin but rather a contribution margin. So, we see profits exceeding variable costs and revenue exceeding variable costs. Our March VAC, variable contribution, is in excess of 40%, as is July and a peak period like December. As we grow those markets and those profitable time frames, we would expect that level of contribution.

One of the things about the utilization comment in 2019 is there were unique factors, particularly strong military flying among other things. While we're not saying there aren’t two hours of opportunity, we're just noting there's some potential we may not achieve the nine-plus hours we observed in 2019 due to those unusual circumstances. However, there's plenty of opportunity for increases in utilization. Finally, downward pressure on utilization will come from the check cycle that Dave mentioned earlier. Our spending ratio is higher than before, and we'll need to ensure we perform exceptionally well operationally, and that requires a measure of conservatism on utilization.

Great. And then my second question. Regarding fleet procurement and related issues, I appreciate your point about being less impacted than other carriers, whether it’s with the GTF or the grounding of the MAX 9. However, it seems like one of the large OEMs will primarily have one aircraft that airlines care about—the MAX 8—while interest in the MAX 9 appears to be slim. This could push prices higher in the used market for 800s and potentially increase demand for 900 ERs or even 700s. What are you seeing in the market? It's encouraging to see that you picked up two more 800s from Fly to Buy and five from Oman, giving you seven aircraft for growth. Have you identified any more shelves or opportunities? Also, what are you seeing in terms of pricing in the used aircraft market? It appears that demand is driving prices up given the OEM constraints. Any insights would be appreciated. Thanks.

The used market is indeed strong. All the challenges OEMs face are trickling into the used aircraft market, impacting availability and pricing favorably for aircraft owners. We're in a comfortable position where we don't need to make deals for a couple of years; we're generating positive cash flow and remain active in the market. While we are participating in discussions, the gap between bid and ask has widened over the last few months. We’ve only acquired one aircraft in the past year and may maintain this trend for the foreseeable future, about two years. However, we could grow this airline by 40% without making any new aircraft acquisitions.

That's great color. Thanks, everyone.

Thank you. One moment for our next question. Our next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Hey, good morning, guys, and thanks for taking the questions.

Hey, Brandon.

Dave, can you talk to us about expectations for April and the second quarter? Based on your model and peak schedules out of Minneapolis in the first quarter, 2Q can be a little softer. What’s your perspective on profitability for at least the first half of the year?

A bit of expectation setting: Easter is much earlier this year than last, which will impact April's year-over-year comparisons negatively. Last year saw exceptional performance in April, and we don’t expect that to be repeating this year. However, the trends we've seen since the COVID recovery have broadly maintained themselves. We’re looking at 25%, 30% TRASM improvements compared to 2019, adjusting for calendar shifts. However, the second quarter won't be nearly as strong as the first, as expected this year, but we're very optimistic about our current bookings.

We've had a continued ability to add capacity where we know we will be profitable. We work closely with our operating team to determine where we can add incremental capacity in the second quarter. For those keeping score with BO (block hours) and similar metrics, not everything is included yet, but we acknowledge of what the world looks like in the second quarter and already have a plan.

Our scheduling philosophy involves reserving capacity to allocate it as bookings progress. This is the right approach for our business. Many airlines schedule higher, leading to cancellations as bookings come in. We do the opposite, holding back a couple of percentage points of capacity to allocate as needed, which also helps.

I appreciate that. And Dave, regarding expectations in the workforce, I know you mentioned lower premium pay this year, but what other cost aspects can you speak to?

Cost control across the company has been solid. We’re benefiting from operating leverage as we grow. Our fleet has the capacity needed for 2024. Operating leverage will kick in, providing CASM (cost per available seat mile) benefits. Additionally, several IT projects we're working on should contribute to lower CASM as well. Except for the maintenance issue I mentioned, costs are well managed. There's no single initiative to highlight; overall, costs across the company are currently managed effectively.

Thank you.

Thanks, Brandon.

Thank you. One moment for our next question, please. Our next question comes from the line of Christopher Stathoulopoulos with Susquehanna. Your line is now open.

Good morning. Thanks for taking my question. What percentage of your charter is currently under contract? And how much is due for renewal this year?

About 85% of our charter revenue right now is under long-term contracts. As issues with pilots and other staffing matters resolve, we want to drive more ad hoc revenue. For now, around 85% is long-term, and we don't have any significant contracts due for renewal.

No, we're actively managing any that may be up for renewal and are pleased with how our portfolio aligns with our objectives.

Great. And the decline in block hours for cargo, is that reflective of a weak peak or perhaps a regional shift in Amazon’s network between carriers?

That decline is entirely due to the C-Check cycle and some weather disruptions we faced. It’s unrelated to shifts in Amazon's plans or anything else.

Okay. Great. Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Catherine O'Brien with Goldman Sachs. Your line is now open.

Hi again. Thanks so much for the follow-up. One quick question regarding the share repurchase program. You've been active in the last two years, and I think there's around $11 million left. Since CapEx is stepping down substantially, do you have any comments on potential changes in capital allocation? Should we expect to see more shareholder returns?

Yes. Your observation about our free cash flow generation is accurate. CapEx at the company will decrease by more than half between 2023 and 2024. If we deliver the results we anticipate, we expect to generate significant free cash flow, and we’ll have to decide how to use that cash. Share buybacks are definitely an option. We don't have a lot of debt that's economical to pay down, with one exception. Looking ahead, we will consider whether to pursue share buybacks or pay down that one piece of debt. We are committed to fully funding cost reduction and revenue-generating initiatives, especially on the IT side, and we'll maintain that with the $100 million I mentioned for 2024 CapEx. We’re in a strong position with plenty of flexibility in how to deploy cash in both 2024 and 2025.

That’s great. Thanks so much.

Thank you. I’m currently showing no further questions at this time. I’d like to turn the call back to Mr. Bricker, Chief Executive Officer, for closing remarks.

Well, thanks, everybody, for joining us today. Have a great day, and we'll talk to you in 90 days. Thanks.