Sun Country Airlines Holdings, LLC Q2 FY2025 Earnings Call

Hello, and welcome to the Sun Country Airlines Second Quarter 2025 Earnings Conference Call. My name is Andrew, and I'll be your operator for today's call. Please be advised that today's conference 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; Bill Trousdale, Chief Financial Officer; and 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, 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 and our most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our second quarter 2025 earnings press release on the Investor Relations portion of our website at ir.suncountry.com. With that said, I'd now like to turn the call over to Jude.

Thanks, Chris. Good morning, everyone. We're pleased to report our 12th consecutive quarter of profitability. Our diverse 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. The theme in 2025 for Sun Country is about growth in our cargo business. At the end of August, we expect to have all 8 2025 cargo additions in service, bringing our cargo fleet to 20 aircraft. We anticipate fleet growth, along with contractual rate increases, will roughly double versus prior contracts our cargo revenue once these additional aircraft reach mature utilization. In the short term, this rapid growth has caused a pullback in our scheduled service volumes. We are planning that these reductions will be recovered as we move through 2026. I want to provide a little color as to the effects of this rapid cargo growth as it has on our results. Our 2Q results reported yesterday reflect the year-over-year TRASM improvement of 3.5%. Within the quarter, each month had a positive unit revenue performance. May had the best year-on-year improvement with TRASM up 6.6%, which is consistent with our expectation that off-peak and shoulder periods are the most sensitive to capacity changes. Importantly, the peak summer months of June, July, and August could absorb much more capacity than we were able to deliver with little falloff in unit revenue performance. Here's the point. First, the rapid growth of our cargo business has required us to pull back scheduled service during our peak summer months. Second, during peak months, unit revenue improvements won't overcome unit cost pressures of lower utilization. This situation will be most acute in July and therefore, most impactful in 3Q '25. We expect margins to expand as we build back our scheduled service we're flying that was productive but that we had to cut. With all this complexity in our current results, I think it's worthwhile to look into the future when we get the cargo fleet fully utilized, recover our passenger fleet utilization and add in our own fleet of leased-out aircraft, mostly 900s, coming back to us through 2026. That will be an in-service fleet of 70 aircraft, 20 cargo, and 50 passenger. With current demand for our product and the current fuel prices, I expect the business to deliver roughly $1.5 billion in revenue, $300 million in EBITDA, and $2.50 in EPS. The timing of getting to this is a bit uncertain as we're challenged with induction timing and pilot upgrades, but I expect to be there right around the second quarter of 2027. In the meantime, we'll be focused on deploying our free cash flow. Our success in achieving these results will be mainly dependent on our ability to continue to deliver a great product. For 2Q, I'm particularly proud that we delivered the industry's best completion factor, our most important operating metric. Airline operations are a team event. I'm so proud of all our folks who are delivering for our customers every day. Over to you, Bill.

Thanks, Jude. As Jude mentioned earlier, we are pleased to report that the second quarter marked our 12th consecutive quarter of profitability. Our truly diversified revenue streams focused on traditional scheduled passenger service, charter passenger service, and our growing freighter service delivered the highest second quarter revenue in Sun Country history and generated a GAAP pretax margin of 3.2% and an adjusted pretax margin of 3.9%. Furthermore, this is our third consecutive quarter of both total revenue growth and year-over-year improvement in pretax margin. During the second quarter, our cargo block hours were lower than we had anticipated at the beginning of the quarter due to the timing of cargo aircraft deliveries. That being said, we were able to pivot our pilot resources toward passenger flying and more than offset the reduction in cargo revenue with increased charter revenue, demonstrating the powerful benefit of our uniquely diversified business model. As of today, we have received delivery of all 8 of our incremental cargo aircraft, and as Jude mentioned, we remain on track to have them all in service by the end of the third quarter. Second quarter total revenue of $263.6 million was 3.6% higher than Q2 of 2024 on a 0.5% decrease in total block hours. Revenue for our passenger segment, which includes both our scheduled service and our charter businesses, was down 0.8% year-over-year, primarily on a greatly reduced scheduled service operation. Due to our focus on growing our cargo segment this year, scheduled service ASMs declined 6.2% in Q2 versus the same period last year. Scheduled service TRASM increased 3.7% as total fare increased 6.5%, which offset the 1.3 percentage point decline in load factor. Throughout this year, we have seen scheduled service revenue book closer in and are not anticipating that to change anytime soon. As Jude described, second quarter demand was strong with May exceeding expectations. Third quarter scheduled service ASMs are expected to contract between 9% and 10% as we continue to pull back in support of the growth of our cargo business. Second quarter charter revenue grew 6.4% to $54.3 million on a 7.9% increase in charter block hours. As a reminder, some of our contracts have revenue reconciliation based on fuel prices. Since fuel prices were down 15% in the quarter versus the same period in 2024, we naturally received less fuel reconciliation proceeds than we did a year ago on a per block hour basis. Excluding this fuel revenue reconciliation, revenue received from charter flying easily exceeded the 7.9% increase in block hours in the quarter. About 77% of our Q2 charter block hours were flown under long-term contracts, which is a similar level as Q2 of last year. Revenue in our cargo segment grew 36.8% in Q2 to $34.8 million. This was the highest quarterly cargo revenue in our history. Cargo block hours grew 9.5% as we had 15 cargo aircraft in service by the end of the quarter, up from 12 in the previous year. We expect to have all 20 flying by the end of the third quarter as our cargo aircraft induction process is now pacing as planned. Turning now to costs. Q2 total operating expense grew 2.2% on a slight decline in block hours. Adjusted CASM increased 11.3% and was heavily impacted by the 6.2% decline in scheduled service ASMs arising from our shift out of the passenger business into cargo business. We project this year-over-year quarterly increase in CASM to be the highest such increase in 2025. It is important to note that our adjusted CASM will remain elevated as we do not anticipate resuming the growth of our scheduled passenger service until the back half of 2026 following the annualization of our cargo growth. Salaries grew in Q2, 12.9%, in large part driven by a 7% headcount increase, the increase in pilot contractual rates from the beginning of the year and our new flight attendant contract that was ratified in the first quarter. Also during the second quarter, landing fees and airport rent expense increased 9.1% on higher rates, while the 14% increase in other operating expenses was primarily the result of an increase in operation and a decrease in activity from our engine part sales programs. Regarding our balance sheet, our total liquidity at the end of Q2 was $206.6 million. Given our focus on cargo growth in 2025 and into 2026, coupled with the aircraft currently on lease to third-party airlines, we do not anticipate a need to purchase any incremental aircraft until we begin looking for capacity growth for 2027 and beyond. During this quarter, we took redelivery of our second Boeing 737-900 that was previously on lease to another airline. And we expect both of those aircraft to enter service later this year. We also extended the leases on 2 of the remaining 5 aircraft that are on lease to other airlines. And we now expect 2 of those 5 to be redelivered to us in Q4 of this year and 1 in each of Q2, Q3, and Q4 of 2026. We still expect 2025 CapEx to be between $70 million and $80 million with $21 million already spent in the first half of the year. Our total debt and lease obligations were $562 million at the end of Q2, down from $619 million at the beginning of the year. We expect to pay down an additional $44 million in debt by the end of the year, and we still have available all of our $25 million share repurchase authorization from our Board of Directors. Turning to guidance. We expect the third quarter total revenue to be between $250 million and $260 million on an increase in block hours of 5% to 8%. I would like to point out that included in our Q3 revenue guide is a reduction of approximately 33% in other revenue versus our Q2 results, driven by a reduction of the number of aircraft we have on lease to unaffiliated airlines, plus a $2.7 million Q2 benefit of a lease redelivery as described in our 10-Q. We are anticipating our Q3 fuel cost per gallon to be $2.61 and for us to achieve an operating margin between 3% and 6%. Our business is built for resiliency. And similar to what we observed in Q2, we will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, operator, I will open up for questions.

Our first question comes from Ravi Shanker with Morgan Stanley.

So Jude, thanks for that trajectory on the kind of long-term normalized EPS. Can you just talk about how purely idiosyncratic versus industry macro dependent that path to $2.50 EPS is and maybe kind of what you're assuming for industry conditions at the time in 2Q '27?

Sure. Thanks, Ravi. When we consider our long-term revenue forecast, we use an expected inflation rate of about 3% as a general tailwind. We also apply a two-factor model that takes into account changes in our fleet utilization and absolute growth. We're not anticipating any shifts in utilization compared to last year in our forecasts. Overall, it's a normalized view of unit revenue performance, current fuel prices, and predictable costs, which for the most part have stabilized following the post-COVID period. Therefore, our assumptions are pretty balanced, without leaning too aggressively in either direction.

Understood. That's helpful. And maybe as a follow-up, apologies if I missed this, but I know your Amazon revenues are not volume dependent. But do you have any sense from them as to what the peak season is shaping up like because that's still somewhat debated in the space?

Yes. I'll make a couple of comments, and Bill has done a lot of work on this. I mean, the basics are that the utilization of the assets and the availability of assets are both delayed. So we're taking airplanes, we're doing work to them to get them ready for service. They're entering service later than we expected. And by virtue of that happening, the fleet isn't as committed because we want to make sure that we're executing well. And so it's just taking a little bit longer to get to kind of...

Terminal velocity on that fleet.

And our next question comes from the line of Brandon Oglenski with Barclays.

Jude, maybe I can follow up there. Can you remind us, do you have like a step-up in pricing on that contract as well later this year? Or is that an issue looking into next year?

Yes, we have an annual increase in the contract on its anniversary. This is standard practice. With the new fleet being introduced, we recently made adjustments to the economics of the updated agreement when we placed the last aircraft.

So current rates will be adjusted by annual escalators from here moving forward. And current rates are much higher than they were this time last year based on the contract that we signed with Amazon at the end of last year.

Okay. But we're at that new high level run rate now?

Yes. As Bill said, it just kicked in.

Just kicked in. So Q3 will be the...

Okay. Got it. And then, Jude, maybe just a bigger question about industry capacity and maybe strategic actions that can be taken here, just given some of the challenges that your competitors, the larger low-cost competitors have?

Yes. Our strategy is to continue executing well and achieving strong results while looking for organic growth opportunities that may arise from industry restructuring or disruptions. I agree that some airline operators are facing challenges. Our focus is on maintaining a strong balance sheet and continuing our execution. We hope to act swiftly when opportunities arise. However, many carriers are struggling due to overcapacity, which prevents us from entering these markets until conditions improve. Therefore, we are committed to executing our plan, expanding our Amazon base for flexibility in service capacity, strengthening our balance sheet, possibly returning some excess capital to shareholders, and being prepared to seize opportunities when they occur.

And our next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Jude, appreciate you speaking to the longer-term earnings power. But wanted to ask you, just maybe in the more intermediate term, it feels like we've been in kind of a known holding pattern where you're holding resources in expectation for this cargo ramp. It sounds like although there's been some shift, the idea that you're going to be kind of fully ramped by the fourth quarter is still on the table. So maybe you could just help us understand kind of the intermediate term margin improvement when you kind of hit your stride in cargo, which feels like the fourth quarter and feel free to push back on that if you don't feel like fourth quarter will be a good measurement point.

Duane, yes, I think the fourth quarter for cargo ramp looks promising. We're on track for that. Currently, we're expected to increase pilot availability hours by 10% year-on-year, which provides us with stable and predictable output without the need for additional infrastructure. Since cargo is pilot intensive, we will see a slightly lower growth in block hours compared to credit hours. When we planned for the third quarter, we anticipated the cargo business to be larger than it is due to the reasons mentioned earlier, leading to a slightly smaller scheduled service. However, we won't benefit from any cost savings on fixed expenses. We have a larger fleet, and we're also going through lease returns with our planes. Normally, airlines start accumulating costs for an aircraft once it goes into service, but we continue to depreciate the asset during the lease redelivery process, which results in unproductive assets on the passenger side. The overhead for our passenger fleet remains unchanged from before the cargo ramp began, creating cost pressures on a unit basis as we manage this cargo growth. With 10% growth expected this year and next, we'll likely be in a growth phase for our scheduled service operations by the second quarter of next year, continuing to integrate the fleet we already own into operations after that. There may be some challenges, but we aim to lead the industry in margins, even though the growth rate may be somewhat limited as we adjust to this cargo expansion.

I appreciate those thoughts. Regarding your initial view of 5% to 8% block hour growth for the third quarter, could you comment on how that looks by segment?

Yes. Bill, you got that?

Yes, I have that. For the third quarter, obviously, there's going to be a tremendous amount of block hour growth in our cargo segment probably year-over-year, up between 40% and 50%. Scheduled service will be down high single digits. Charter service will be kind of up single digits.

One important point I wanted to highlight in my prepared comments is that the capacity cuts in scheduled service for July are affecting profitability. These cuts are costly because the market can easily absorb those flight hours, and reducing highly profitable flights doesn't significantly change our unit revenues. In contrast, in September, we are cutting marginal flights that were initially in the schedule, so there's minimal impact during months like September and early May, which are typically off-peak. Currently, we are facing the most severe imbalance across our segments in July and August as we are reducing very productive flying.

And our next question comes from the line of Michael Linenberg with Deutsche Bank.

Just sort of back to Duane's question and maybe trying to get it a little bit more granularly. When we think about just the margin drag in the September quarter, Jude, you've talked through all the puts and takes about the ramp-up and the fact that you're underutilizing across your sched service. How should we think about it on a margin basis? I mean, are we looking like a drag of 300, 400 basis points here? Any color on that would be great.

I think for the third quarter, you could do $10 million, 4% on pretax.

Super helpful. And then my second question, as we've heard from other carriers, the consumer may be changing in how they book. We've heard carriers talk about shorter booking curves. Obviously, the most price-sensitive customer seems to be the most impacted right now in the current macro environment. Is there anything that you can talk about? And maybe what you're seeing, and I realize you're coming into this with a very constrained capacity backdrop, which may make it more difficult for you to discern some of the maybe structural or secular changes that we're seeing in how people book, et cetera.

Yes, I’ve listened to the second quarter earnings calls released so far, and we’re not observing a similar situation. Our bookings are robust, and we’re experiencing year-on-year monthly improvements in unit revenue. Our peak periods continue to perform well, which drives our business. Compared to pre-COVID margin comparisons for peak days, we are managing to replicate those conditions despite increased fuel, airport, labor, and maintenance costs related to OEM pricing. This is all being passed through, and the situation is remarkably similar. Additionally, many are suggesting that the domestic market is weak and that we might face pressure in the third quarter, with some airlines hoping for a recovery in the fourth quarter. However, when we look at our third quarter expectations from our annual planning, our budget closely aligns with the performance we now anticipate for that quarter. Overall, things are looking good, primarily due to a healthy local economy in Minnesota. The industry capacity across our network is either growing slowly or modestly declining. We’ve also managed to absorb most inflationary pressures, allowing us to have a clearer outlook on costs as we increase capacity in our network. Things are looking positive, and we have strong momentum heading into the end of the year with the rollout of our loyalty program. We're also providing PBS to our crews, which should boost productivity. We’ve absorbed the last contractual rate hike for our pilots this year, which will be an advantage for next year's comparisons. One thing to note regarding the comparison basis is that in the year-on-year third quarter, the only month during the six-month period of the second and third quarter where we may see flat or slightly negative unit revenue is July. This is because the comparison for 2024 includes Delta’s CrowdStrike outage, during which we generated a significant amount of last-minute revenue at high yields. However, beyond that, July appears promising. We are currently booking for winter and are scheduled through April, with strong bookings for our winter peak. August's performance is also significantly better than we anticipated just weeks ago, suggesting we are experiencing what Scott Kirby mentioned regarding the recent uptick in close-in bookings. We are certainly seeing that here, but we are not encountering the discrepancies that other airlines have noted.

And how much of the December quarter is booked right now? Do you have a sense of that?

Mid-teens. We're looking at the actual numbers right here. Hang on one sec, Mike. What you got?

That we're sort of, yes, mid-teens we got here, yes.

And our next question comes from the line of Tom Fitzgerald with TD Cowen.

Jude, just wanted to return back to capital allocation. And it just seems like you guys have such a lower risk opportunity here versus a normal airline. And with the stock trading around like 4x the 2027 potential or mid-year '27, how do you weigh like next year, how do you kind of weigh that balance between growth opportunities and then shareholder returns? Like, will the PE be kind of the deciding metric? Or what else kind of goes into the calculus?

We operate with a focus on earnings per share and reducing the number of shares outstanding is a valid approach. My perspective is that we have sufficient liquidity and are generating a significant amount of free cash flow. Therefore, we won't make any debt prepayments beyond what is scheduled unless it's tied to a refinancing. We plan to continue accumulating cash. The question we face is whether to return capital to shareholders, pursue asset deals—specifically in aircraft—or maintain capital for potential disruptions in the low-cost sector soon. I anticipate we will likely engage in a combination of all three. Bill, do you have anything to add?

Yes. I would just add, I mean, just one thing that we are cognizant of is a fairly severe inflationary pressure on aircraft assets and specifically engine assets that are important to us so that while we do have relatively modest CapEx outlook, depending on what the severity is of that inflation, it could sort of have some upward pressure, which puts availability pressure on the ability to do further share buybacks. But certainly, at today's pricing, it's more attractive than it was yesterday.

We want to be opportunistic in the asset market. If there's a big portfolio that comes along for airplanes that we intend to operate or engines we intend to use, we want to be able to act without any capital constraints. So that's a consideration as well.

Okay. That's really helpful just to kind of get some of the philosophy there. And then most of mine have already been answered, but just thinking about if things go better than expected in 2026, like what some of those mainly like scheduled service. Do you foresee just given how nimble your model could be like in June and July with the World Cup, is that like something where in the past, like you've gone into markets like Texas or Hawaiian when they've been hot, like do you foresee that as like maybe an upside opportunity or things in the track charter?

So, Tom, no. The World Cup will probably be a slightly negative event for us because we'll be able to schedule around some of the events and pick up some high-yielding traffic, but the offset will be Major League Soccer will be paused during that period. I think it will be probably a little bit slightly negative as a result of World Cup.

Our next question comes from the line of Scott Group with Wolfe Research.

So a couple of questions ago, you mentioned the $10 million impact for Q3. How should we view that for Q4? Do you believe it will be fully resolved by the time we reach 2026?

Yes. The fourth quarter coincides with the peak periods of Thanksgiving and Christmas, which usually last around 30 days when performance is strong. If we can regain our pilot capacity by then, there shouldn't be any adverse effects, though that's unlikely. I expect this to be the peak impact, which will gradually improve over the fourth quarter and into the first quarter of the following year. Our next significant opportunity will be in March 2026, and I am optimistic about returning to a situation without capacity constraints in our scheduled service fleet by that time.

And regarding the long-term projection of $2.50 in the second quarter of '27, that seems like a particularly unique quarter. Given that Q1 is typically your peak quarter, why is Q2 significant? Is there a change in your earnings structure due to the recent mix changes? I'm surprised it points to such a specific quarter.

Yes, it's a pretty simple analysis. It's just our 10% growth rolling that out when that gets to a fleet of 70 at the utilization that we expected to be over the long run. So it's just added on.

Okay. Okay. And then maybe just lastly, just to follow up on that. Like, is there a step function that happens there? Or do you think we see sort of linear improvement like in '26 on our way to that sort of longer-term goal.

We are not expecting any significant changes and are taking a linear approach, though there is considerable uncertainty regarding potential variations. This year, we are introducing a new crew base, which is the first outside of Minneapolis in the company’s history. We are unsure of the impact this will have, but we believe it will be beneficial. We're also implementing PBS, which changes how we roster our crews and brings significant efficiencies. Together, these initiatives could significantly alter our growth path and allow us to increase utilization more quickly. Overall, I would say we maintain a cautious outlook on our expected growth, especially considering the current state of pilot hiring, where there are no limitations. Therefore, we are likely being conservative in our projections.

Okay. Great. If I could ask one last question, could you provide any insights on the competitive capacity you're observing as you look ahead to the next quarter or two?

Yes. If you kind of look month by month, if you go all the way out, a lot of airlines haven't extended their schedules past January, which is a head-scratcher in and of itself. But if you look out across our network all the way through our selling schedule, in the beginning of April, it's either flat to down. It looks really, really good. And I can't imagine we don't have with kind of demand maintaining its current level, capacity, very moderate, down single digits across our network. I think we're going to continue to see the kind of unit revenue trends we already produced in the second quarter. Importantly, Southwest pulled back from the Minneapolis market. Spirit, Frontier pulled back from the Minneapolis market. Allegiant doesn't have a Minneapolis in their current selling schedule. I mean we're just seeing this become very quickly a 2-airline market, and I think both carriers are going to be really healthy in that environment.

And our next question comes from the line of James Kirby with JPMorgan.

Maybe just a little more color on the charter and how to model that business out into early 2026, given scheduled service, it sounds like capacity is going to be flat to down in the first half of the year. Is that consistent with where charter capacity should be? And maybe just a comment on ad hoc flying. It looks like last quarter, it was better than historical run rate. And so any comments there as we think about back half of this year and early next?

Sure, let me share some general thoughts on charters before Bill provides guidance. Charters generally fall into two categories. The first is long-term commitments, which resemble our cargo business economically, providing stable and reliable margins along with pass-through costs for ground handling, fuel, and other expenses. These opportunities are unlikely to see significant growth. This includes casino charters, Major League Soccer, and our VIP operations in Los Angeles. The second category is ad hoc bids, which tend to arise closer to their execution date. For us, fall typically features collegiate football charters, while military charters occur throughout the year. We've seen an increase in these ad hoc opportunities in the second quarter due to crew and airplane availability, as our cargo fleet growth hasn't met expectations. Looking ahead, this trend may continue in the latter half of the year, allowing us to be more proactive in pursuing ad hoc options, although I anticipate it will have a limited overall impact on our results. Bill, do you have anything to add?

Yes. We discussed the growth of charter earlier. From a unit revenue perspective, our charter overall is growing on a per block hour basis by approximately 4% annually. There are fluctuations throughout the quarters, but that's a reasonable estimate.

Okay, I understand. That information is helpful. For my second question, regarding the $1.5 billion revenue target by the second quarter of 2027, can you provide a breakdown by segment? If that's not possible, can you confirm if the long-term target weights you've mentioned are in line with your expectations?

$230 million, $240 million of that is going to be in cargo. Bill talked about charter growth, 4% from where it is today. The remainder will be in scheduled service.

Our next question comes from the line of Catherine O'Brien with Goldman Sachs.

So you guys extended 2 leases that you have with the third-party airlines pushing out the returns into 2026. Is that a reflection of your view on staffing or demand, doesn't sound like it, or just the economics are too good to pass up? I'm just trying to get a sense of how you're thinking about when you can start pushing the utilization on that passenger fleet war and if the gating factor is still pilot.

Yes. So that's a scenario where we are faced with all the issues that we talked about where we're growing, but not able to absorb the fleet growth that we're experiencing. And then also the operator really wanting to keep the airplanes. So we're getting great economics by leasing them out until we're ready to operate them. It's kind of an intersection of the 2 points that you brought up.

Okay. Great. And then I know you talked about July having tough comps, the rest of the month RASM will be positive. Can you just give us some more details on how things going to look into the fall? Like how does August compare to June? Any early thoughts on September? Any geographies you'd want to call out as particularly strong or maybe less strong?

Yes, I'm happy to provide more details. The key trend in our bookings is that we are consistently experiencing lower load factors than expected, while fares are higher than anticipated. Additionally, ancillary unit revenue has shown steady low single-digit growth. The trade-off between fares and load factors is a result of demand closer in. By adjusting our pricing and expectations about this demand, we're willing to accept lower load factors to keep seats available for that anticipated demand. Overall, demand is strong in the Northeast and Midwest, while it's relatively flat in Mexico and the Caribbean, and weaker in Southern California and desert destinations. I believe these variations across different regions are typical patterns we see every time we assess revenue. Therefore, I am confident about our projections since we are currently aligning with our expectations.

Yes. No, no, that makes a lot of sense. Maybe I can squeeze this one really quick one in. You mentioned participating in a potential shake-up in the ULCC space. As of now, I know hard to predict, there's not an opportunity at the exact moment, but are you thinking more like acquiring assets? Could that include outright M&A? I know you've talked about that in the past, like you need to see a cost structure and a pilot and a pilot contract that would align better with yours, like as it stands now, are any of those things aligned where you could be talking more outright M&A? Or right now, it's looking more like asset acquisitions, if there is something attractive?

Yes. I consider all of the above, but I don't dedicate much effort to things outside my control. My focus is on asset acquisitions and preparing for organic growth opportunities resulting from industry changes. Given our size, any mergers and acquisitions would likely be something we're asked to participate in rather than initiate. Therefore, I don’t concern myself with that. I believe it’s an unlikely scenario due to the uniqueness of our business model. We are best serving our shareholders by staying focused, executing our plan, and continuing to outperform the industry.

I think it sounds like a proven plan.

And our next question comes from the line of Christopher Stathoulopoulos with SIG.

Going back to the targets on '27. So I just want to understand I guess, the inputs here. So I heard a 2-factor model wasn't clear exactly what's in that, but 3% inflation. $240 million, I think you said in cargo out of the $1.5 billion on the top line. So in utilization, similar to last year, if that's the case. So maybe if you could give on the utilization piece, exactly what's contemplated on the schedule and cargo side? And then is there anything unique with respect to charter? You did call out casinos, Major League Soccer, military, college football, that would be different perhaps versus where those contracts currently sit?

Yes, there's a lot to cover. To start, the 3% figure reflects the impact of inflation on our long-term forecasts. The two-factor model indicates that we expect zero change in unit revenue due to utilization, as we plan to maintain our current utilization rates moving forward. Absolute growth can put pressure on unit revenues, but as we expand capacity or enter new markets, the effects usually stabilize over time. We anticipate that our fleet's utilization will return to 7.3 hours per day for each passenger airplane by the middle of 2027. Regarding charter growth, there aren't many opportunities to expand that business at the moment. Ad hoc operations depend on having flights and crew available, and as our passenger fleet increases, we aim to maintain ad hoc flying at consistent levels, taking advantage of off-peak times when we have excess capacity. That's essentially how we shape our long-term revenue projections. Is there anything you'd like to add, Bill?

I mean, just keep in mind that this year versus last year, that utilization will continue to decline faster in the back half of the year because of the cargo sort of ramping up. And so that's why it's going to take us a while. So you might not see much utilization variance in the first half of the year as Jude is describing it, but that will sort of kick in and sort of bottom out probably in Q1 of next year on a year-over-year basis.

Okay. I have a second question regarding what I heard about some delays with the Amazon aircraft utilization. Is this due to delays in deliveries and preparations, or is there hesitation around schedules because of ongoing concerns about tariffs and demand? If the peak season is weak, are those aircraft available to be used in other areas? I would like to understand better what a weak peak season could mean for utilization and volume commitments.

It's a CMI model. We operate the schedule they give us. And so as the airplanes are coming in and they were delayed, they adjusted by lowering the utilization and also the assumed entry into service dates of the rest of the fleet. We had already built our scheduled service plans that included these higher production levels for the cargo fleet and therefore, we were just under-allocated. That will correct itself in very short order. I can't read anything into what the schedule that they produce was a result of. I just don't know other than those internal issues around getting the planes in service.

Okay. And the weak peak season piece, if that does occur? I realize it's still early.

I'm sorry. Say it again, please?

For peak season shipping, still early, but if the season does come in softer than expected, are you able to do anything else around those assets? And just maybe if you could remind us around the volume commitments and how that all works.

Yes, sure. Looking backwards, generally, the schedule, which is what we love about it is very flat and reliable. So my assumption would be going forward that we would expect the same. And these are Amazon airplanes flown for Amazon's purposes. And I don't expect anything different out of this fleet.

Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to CEO, Jude Bricker, for any closing remarks.

Guys, thanks for your time today. We're really excited about where we're headed and look forward to talking to you again in 90 days. Take care, everybody.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.