Sun Country Airlines Holdings, LLC Q3 FY2025 Earnings Call

Welcome to the Sun Country Airlines Third Quarter 2025 Earnings Call. My name is Marvin, and I'll be your operator for today's call. 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; Torque Zubek, 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 third 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. Thanks for joining us. Our diversified business model is unique in the airline industry as demonstrated by our 13 consecutive profitable quarters. 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 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'll be able to reliably deliver industry-leading profitability throughout all cycles. As discussed on prior calls, in 2025, Sun Country is focused on cargo expansion as we execute on the planned growth of the cargo fleet to 20 aircraft. Today, all 20 aircraft are in operation. Our third quarter cargo revenue for September is up 60% year-on-year, and we expect it to move to over 75% by December based on the current schedule. Consistent with our plans, cargo growth has displaced some scheduled service flying. The year-on-year cuts in scheduled service were largest in 3Q, and we'll be focused on recovering those levels in the next several quarters. I expect to be able to show positive year-on-year scheduled service growth by 3Q '26. For me, the most positive news in the quarter was the inflection in scheduled service TRASM. 3Q TRASM was up 1.6%. However, for September, it was up over 7%. Currently, we expect 4Q TRASM to be up over 6%, with 1Q 2026 it advances even stronger. Our revenue strength is across all regions of our network. And based on our current industry selling schedules, I don't see any reason that those trends shouldn't continue. I continue to expect to achieve $300 million of run rate EBITDA after the second quarter of 2027, operating the fleet we currently have on our balance sheet. The timing of full implementation may be delayed by many factors, some beyond our control. The aircraft that we lease out will be redelivered through the end of next year, and we project that utilization will continue to increase as we train crews to increase block hours. Another positive in 3Q was charter production. We had an all-time record volume while also growing revenue per block hour by 4% year-on-year. In the backdrop of a strong demand for charters, we're able to allocate surplus capacity into this segment. This helps offset some of the underflying of scheduled service. Our ability to flex capacity between charter and scheduled service continues to be a competitive advantage, especially in this environment. Finally, and perhaps most important for our long-term success, we continue to execute a safe and reliable network with 3Q controllable completion factor of 99.3%. Operations as varied as ours are difficult. It's a team sport. I continue to be impressed by all our employees that make it happen for our customers every day. With that, I'll turn it over to Torque.

Thank you, Jude. This quarter marked the completion of our cargo expansion with all 20 aircraft now operating under the Amazon contract. Adding 8 additional aircraft to our fleet was a true team effort and represents a 14% increase in our total fleet. We are currently in a transition period as we begin to annualize our cargo growth and work towards restoring our passenger service business to pre-2024 levels, aiming to expand our passenger fleet to 50 aircraft by mid-2027. During this transition, we have remained profitable and, as Jude noted, achieved our 13th consecutive profitable quarter. Our GAAP EPS for the third quarter was $0.03, and our adjusted EPS was $0.07. The GAAP pretax margin was 8%, while the adjusted pretax margin was 2%, marking our fourth consecutive quarter of year-over-year adjusted margin expansion. Total revenue for the third quarter was $255.5 million, reflecting a 2.4% increase compared to Q3 2024, supported by a 3.8% rise in total block hours. Revenue from our passenger segment, covering both our scheduled service and charter business, decreased by 3.2% year-over-year due to a significantly reduced schedule and service operations as we completed our transition to an expanded cargo fleet. Our scheduled service business improved throughout the quarter, with the total fare in August increasing by 2.6% compared to last year and the load factor rising by 2.7 percentage points to 87%, the highest monthly load factor this year. September showed even better performance, with total fare increasing by 4.5% compared to last year and load factor up by 3.2 percentage points to 83%. Scheduled service ASMs dropped by 10.2% in the third quarter as we redirected resources to support the significant growth in our cargo segment. We will not be adding more cargo aircraft in the fourth quarter, but we will still be annualizing the new growth. Thus, we expect scheduled service ASMs to decline by 8% to 9% in Q4 2025 compared to last year. Third quarter revenue demonstrated strength, with charter revenue growing by 15.6% and charter block hours increasing by 11.1%. Excluding the impact of fuel revenue reconciliation, charter flying grew by 16.7%. The flexible nature of our charter business was evident, with block hours dedicated to ad hoc opportunities increasing by 31%, which helped mitigate the slower growth in third quarter cargo block hours. Charters flown under long-term contracts accounted for 77% of the charter block hours, down from 80% last year. Revenue in our cargo segment saw a 50.9% increase in Q3 to $44 million, marking the highest quarterly cargo revenue in our history. Cargo block hours increased by 33.7% in the third quarter as all 20 cargo aircraft were in service by late August. This transition was slightly slower than we anticipated, leading to higher pilot costs as we hired additional staff to accommodate the increased block hours. Regarding costs, our total operating expenses for Q3 rose by 3.6% due to a 3.8% increase in block hours. When excluding fuel and special items, our operating expenses in Q3 were actually lower than in Q2, despite having 1.3% more block hours in Q3 than in Q2. CASM rose by 10.3% compared to the same period in 2024, while adjusted CASM increased by 5.2%, significantly impacted by the 10.2% decrease in scheduled service ASMs. Salaries in Q3 increased by 15%, largely due to a 10.6% increase in employees, along with rising pilot contractual rates and flight attendant contracts ratified earlier this year. Maintenance costs also increased by 13.5% due to unplanned maintenance events. At the end of the quarter, we closed on a $108 million term loan facility with a fixed interest rate of 5.98% per annum, allowing us to pay off our March '23 term loan with a much higher interest rate and refinance our five 737-900ER aircraft. We have not yet drawn down the entire loan amount and expect to receive the remaining $54 million by the end of 2025. Our total liquidity stands at $298.7 million, including this amount. Additionally, we spent $10 million on share repurchases this quarter and have $15 million remaining in our announced share repurchase authority. Year-to-date, our total share repurchases amount to $20 million. We have also spent $29.1 million on CapEx this year, and we expect to spend between $80 million and $90 million for the entirety of 2025. We do not anticipate significant aircraft CapEx until late 2027 as we still have owned aircraft on lease to other carriers that will return to us throughout 2025 and 2026. These five aircraft will enhance growth in the passenger segment in the coming years. Net debt at the end of the third quarter was $406.1 million, down from $438.2 million at the start of the year. For guidance, we expect total revenue in the fourth quarter to be between $270 million and $280 million, with block hours increasing by 8% to 11%. We anticipate our fuel cost per gallon to be $2.50 to achieve an operating margin of 5% to 8%. Our fourth quarter will also include accelerated heavy maintenance costs that we plan to move forward from 2026 to manage fleet maintenance. Our business is designed for resilience, and we will continue to allocate capacity between segments to maximize profitability and reduce earnings volatility. Now, I will open it up for questions.

Operator Instructions. Our first question comes from the line of Brandon Oglenski of Barclays.

Jude, how do we consider the impact of increased cargo mix going into early 2026 on the seasonality of the business? Traditionally, you achieve a significant margin in the first quarter with departures from Minneapolis.

The ramp-up for cargo has been slower than we anticipated. In a couple of weeks, we will be finalizing our December schedule and plan to achieve over 5,000 block hours for the cargo fleet. This figure aligns with what we expect to maintain as a permanent run rate, considering any out-of-service time for planned maintenance. This will influence our cargo operations for most months in 2026. However, we will continue to see significant seasonal variability, as the value of cargo allows us to operate during peak times. The challenges in the third and fourth quarters have necessitated a reduction in peak flying hours to support cargo growth, which we will restore in the coming quarters. We will be adjusting the schedule, which could heighten the seasonality of our operations as we move into March 2026 and March 2027. Therefore, I do not foresee any major shifts in the seasonality of our business, and the first quarter will continue to be a significant period for us.

Okay. I appreciate that. And Torque, congratulations on the new role here. I guess it'd be great to get your impressions being there for a while now. And also, I think you made some commentary around maintenance costs in the third and fourth quarters. So maybe if you could elaborate on that.

Yes. When we discuss our maintenance costs, they are largely influenced by the fleet we operate. As we have expanded our fleet, there is a greater need for maintenance. I’m not sure, Steve, if you would like to add anything?

Yes. It's an opportunity to pull it into 2025 to stabilize the maintenance demand and provide a more predictable platform to run our business.

The lumpiness of maintenance will always be heavy checks, including engine repairs. And this is a relatively high period for us.

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

So you guys noted that fares and loads were strong in August, September accelerated from August. I guess is that continuing into the fourth quarter? I know, there's some pretty tough comps on an industry basis in late November and December, but you've got capacity down year-over-year. Just any color you can provide us on how you see RASM progressing through the months of your 4Q outlook? And any read on the holiday bookings would be great.

Yes, it certainly seems like we're in a strong position compared to the rest of the industry. I don't have any concerns. As I previously mentioned, we experienced over 7% improvement in TRASM for scheduled services in September. Off-peak periods are more sensitive to changes in capacity regarding TRASM impacts. This means that reducing capacity in September affects TRASM more than it does during peak periods when demand is high. However, we're entering our busy winter season, and sales look exceptionally strong for this period. Our forecast indicates over a 6% year-on-year improvement in TRASM for the third quarter. Currently, there are no alarming trends across our network. I'm not seeing any competitive shifts that raise concerns or any weaknesses compared to last year. Minneapolis is evolving into a two-airline market due to the exit of Allegiant and Spirit from our home market. Overall, everything looks very positive, and I have no negatives to report.

Happy to hear. I'll take it. I guess maybe one for Torque or someone else, and welcome, Torque. On my math, CASM ex fuel is accelerating quite a bit into the fourth quarter. I'm getting to like mid-teens inflation, but then on a block hour basis, closer to 5% year-over-year. I guess, first, lots of moving pieces. So can you correct me if I'm wrong? And then give us some color on the impact of that maintenance pull forward is having in the fourth quarter? And then maybe just higher level, as cargo inductions are behind you and the start of service further behind you, any preliminary thoughts on what 2026 capacity and unit cost inflation could look like high level? I know last quarter, you mentioned you expected cost pressure to persist through first half. So sorry, that's kind of a twofer for my second one.

Yes. Thanks. Well, I think when we look at our maintenance coming up, we've got $2.4 million of heavy maintenance forecasted in 2026 right now. So that's certainly going to...

Okay. That's from '26.

Yes, sorry, we are moving that into Q4. I apologize for the confusion.

Yes. We mainly consider capacity in terms of aircraft available versus block hours, which means we are currently constrained by block hours. Credit hour growth from 2025 to 2026 is expected to be around 10%. However, the credit hours used for cargo do not equate to the same number of block hours as those used for scheduled service flying. Consequently, our growth in block hours will lag behind the expansion of credit hours due to the growth in cargo. What I am primarily focused on to help us return to a mid-teen annual operating profit margin is the increase in scheduled service flying during peak periods, which is currently limited by our credit hour constraints. As we hire and upgrade pilots, our capacity will increase, and that represents our best margin opportunities that we are unable to pursue under the current staffing limitations.

Our next question comes from the line of Tom Fitzgerald of TD Cowen.

Just sticking with labor for a minute. I remember historically, there's been a kind of just more of a broader theme of having trouble getting captains upgraded or first officers upgraded from the right seat to the left seat and there have been discussions about maybe opening a base in Florida. I'm just wondering what the latest is there and what you're thinking is right now?

There's a lot going on in flight ops here. We, for the first time ever, rostered our crews in October with PBS which drives a lot of efficiency. That was part of the 2021 deal that we did with ALPA and are finally able to execute on that. So that will drive efficiencies going forward. And we do intend to open a base. That process is ongoing. It's not going to be in Florida. It's going to be in Cincinnati in support of our largest cargo operation there. Both of those things, I think, will increase demand for captain upgrades. But you're right, it still is an issue here at Sun Country and captain upgrades are the limiting factors as we do long-range planning into '26 and '27.

Okay. That's really helpful color. Just kind of curious in thinking about the balance sheet. I know there's still some left on the current authorized buyback program. But I'd just love to get your latest thinking on capital allocation and liquidity, just as with Torque on board now and where you're thinking about as we move into 2026.

I'll give you my initial thoughts and then throw it over to Torque. I mean, we have a lot of liquidity, and we're producing a lot of free cash flow. We'd love to be really opportunistic in buying metal, but we've been trying and there's not a lot out there that meets our price expectations. So I don't expect us to find a lot of CapEx opportunities. So this is going to be buybacks. That's where we are. Torque, anything to add on that?

Yes, I believe that when we have capital available and see opportunities to invest, we will pursue them. As Jude mentioned, the market for aircraft and engines is quite limited, and those are the main areas we are focusing on for investments.

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

I see that Spirit is planning to exit the Minneapolis market in December. Earlier this year, they were serving around six cities. Does this create any opportunities for gate space or real estate for you? Are there other airports available, especially considering they turned down leases at about a dozen locations? What are the prospects for you in terms of competitive capacity in your key markets?

The Minneapolis domestic capacity, specifically North American capacity, is either flat or decreasing according to our selling schedule, which has been extended through Labor Day 2026. As you mentioned, airlines are exiting the market, and Spirit will stop serving Minneapolis soon. They operate out of Terminal 1, but since we have our own terminal, it doesn’t significantly alter the situation for us. I want to emphasize that we are not capacity constrained in Minneapolis at all, which is one of the advantages of our business. We can park as many airplanes as we need and have sufficient gate space. There are no real constraints here. However, we do face capacity challenges at some of our busiest airports, like Boston Logan, where we struggle to extend our schedule beyond 1 p.m. We also have capacity constraints at Newark and JFK, as well as LAX. So, Spirit pulling back may be beneficial and could open up more opportunities. The main effects from Spirit will be minimal for us, as we don’t directly compete with them much. Instead, Frontier is likely to enter their markets, and they have significant operations in Detroit and Atlanta, which could impact Delta and possibly reduce some capacity in Minneapolis. Therefore, I view this situation as a secondary effect, and we are not among the airlines that would benefit the most from the cuts we’re seeing from Spirit.

Okay. That's helpful. And then just a second, this goes back to your initial comments where you talked about TRASM kind of running over 6% in the fourth quarter, and then you went on to say that the 1Q 2026 advances are even stronger. At this point in time, like how much are you booked up in the March quarter?

With January sold to 35% loads today, our first quarter sells further in advance than the rest of our schedule. However, it's not enough to make a strong assessment about the first quarter. In other words, we don't have enough sold to be certain about the strength we're seeing, but we are ahead in load factor and fare, with sold PRASM. Looking this far out with relatively low sold loads can be quite volatile, but we're up about 25% in January so far. This will moderate because a load factor increase of 10 points is just not feasible. Nonetheless, that's higher than it was for December and November, indicating that it continues to strengthen.

That 35% is a bit higher than I realize is typical for your big quarter, and it exceeds what other carriers experience. You are likely 10 to 20 percentage points above your competitors.

Yes, Mike, that gets to the core of the strategy. I mean we're relevant in this community. We're a small airline, but relevant to the community we serve, and we have a differentiated model. So if you want to go nonstop to Mexico, South Florida, Southern California, Caribbean destinations, we're the carrier of choice here in the Twin Cities. We're expected to be small and relevant and big and irrelevant everywhere. And I think it's kind of playing that out.

Yes. That's right. One last one, just to squeeze in kind of a wonky question. I see the 900 ERs are now scheduled. Obviously, they give you more capacity, so it's going to work in markets probably like Orlando and Phoenix. But is there anything interesting or unique? I mean I know they have the range for Hawaii, which you used to serve. Is there anything that we could see with the 900 ERs that may be a little bit different than maybe what you've done in the past?

Sure Mike, sorry to disappoint. I think those airplanes are just going to go on trunk routes. You can take a look at our largest markets by volume, and they're going to be 900 markets, either a mix of 9 and 8s or pure 900 markets. So just to call out a couple, Minneapolis, the Fort Myers, L.A., Vegas, MCO, Boston, Sea-Tac, those kind of markets.

Our next question comes from the line of Ravi Shanker of Morgan Stanley.

This is Katherine Bell on for Ravi. I was curious how we should be thinking about charter in 2026. I know you mentioned a bit on 3Q, but just curious what you guys are seeing for next year.

Katherine, so charter comes in a couple of different flavors. I'll just kind of call them out. We have track programs that are committed contractual flying for counterparties, and that consumes about 6 aircraft. We have a VIP operation, casino operations and Major League Soccer. Separate from those, we have a military program that's a committed program and also a lot of ad hoc flying. I just want to point out that with the government shutdown, that flying has been unaffected. It continues to be strong. And then the third is ad hoc, which mostly is sports program. So this time of year, NCA Football. And that's hard to predict because it shows up close in. We set a record, as I mentioned, in the third quarter on volumes. There's been a lot of airlines that have left the market like iAero. And then there's a huge new customer to charters in ICE. We don't work for ICE, but they're consuming a lot of charter capacity. So there's a lot of demand growth, and there's fewer people providing that lift, and it's been a really good thing for us. We still look at ad hoc opportunities primarily as a way to offload available capacity. So we'd rather commit capacity to sched service. But if we have the excess capacity, then we bid on charter opportunities. And thus far, it's been really strong. I can't give you more material guidance though, into '26 because first quarter is always kind of a trough. There's not a lot going on, but the summer should be really strong if things continue the way they're going.

Got it. That's really helpful. Just a quick follow-up. In your prepared remarks, you mentioned that the percentage of charter under long-term contracts decreased from 80% last year. I'm curious about why that number declined. Did some of those contracts expire? Do you actively seek out new contracts, or do people approach you? I'm interested in understanding how that process works.

Ad hoc mix.

Our track programs have not seen significant growth aside from the rate. The volumes for our casino programs, Major League Soccer, and our VIP program have remained relatively flat. What I understand is that ad hoc grew at a faster pace, which has led to a lower mix of contracted flying.

Our next question comes from the line of Christopher Stathoulopoulos of SIG.

Jude, just talk about the puts and takes around your operating margins for next year. So we have the maintenance pull forward into 4Q. You've given us a lot of color on how you expect cargo to move. I think December is when you really see that, I think, spooling up or hitting a run rate. Maybe talk to, I guess, for scheduled service, the puts and takes around costs and timing to kind of get back to those pre-Amazon margins. And also on the charter piece, there are some events. The question before, you referenced, I think Soccer World Cup next year, America's 250. So it would seem that there's some opportunity there. So at a high level and really but kind of focused on schedule puts and takes around op margins next year, I guess, net of this maintenance pull forward into the fourth quarter?

Two primary inputs. First is going to be the TRASM continuing to improve in the rate that we've seen. I don't see any reason that, that should change. And then the second one is we should hit an inflection point on unit cost. And that's because we did a deal with our flight attendant union that's effective for this year. We have the final pay increase for our pilots effective this year. We don't have a lot open on labor. And so those rate increases will have good comps, and therefore, also our efficiency initiatives will start to take hold, like I mentioned earlier, PBS and incremental basing. So we should start to see an inflection point. And then you have the lumpiness of our maintenance programs, specifically heavy checks. We don't do engine overhauls here. We buy in lieu and replace in lieu of repair. So that should be pretty constant. Those costs flow through our D&A. We're getting a lot of cost pressure like all airlines from airports. I don't see that abating much. Everybody's massive capital programs just sort of everywhere. So that will continue to pressure us. But I think overall, what we're expecting year-on-year CASM ex to hit kind of a 0, flat level in the middle of next year, late next year and improve from there. So I feel really good about unit cost trends. We should finally start to see the post-COVID inflationary pressures kind of run their course and those to kind of stabilize. I think it's going to be really good. Torque, anything to add on that?

No.

It's so block hour dependent because there is the charter piece that you mentioned that is ad hoc. There's what Amazon is going to do peak season, of course. But do you think for the full year on a per block hour basis that unit costs could be down?

No, the mix is going to change. It costs significantly more per block hour to operate scheduled service due to expenses like fuel and ground handling. We will continue to face pressure on that because of shifts in our segment mix.

Our next question comes from the line of the Visa. I realize it's still early response thus far. And if you could remind us of any remuneration targets you've communicated.

I have publicly stated that our credit card program generates approximately $20 million each year, which represents the full implementation of the Synchrony contract. We are on track, but it may take about a year to increase the contribution per passenger to our desired levels. After that, the focus will be on scaling volumes. Synchrony has been excellent, and I am very satisfied with the technological advancements. Our customers are adopting the new card much faster than we anticipated. Overall, everything is progressing positively with that program.

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

This is Jake Gunning on for Duane. It looks like you generated very strong free cash flow in the third quarter. Would you consider that normal seasonality? And if not, did the ramp in any other segments maybe contribute on the working capital side?

Let me give you a general comment there. There's a lot of seasonality in our business, and therefore, there's a lot of seasonality in our ATLs. So a lot of our free cash flow by quarter is going to be based on ATL expansion. And as we talked about earlier, we're selling now into our winter peak season with higher volumes and higher fares. So there's a lot of ATL pickup in that. Torque, any other color?

No, I think what we're seeing is very strong and the builds are where we expect them to be. So we'll be in good shape.

Great. That makes sense. And then just on the aircraft side, you alluded to it earlier, but are you seeing any movement in used aircraft values for the 737?

No, we haven't done a deal in a long time. It's been pretty brutal. Fortunately, we did a lot of transactions coming out of COVID and buying out subleased aircraft. So to our commentary throughout the whole year, we have a 70 aircraft operation, 50 of those airplanes we own and are on the balance sheet, but 7 of them at the beginning of the year were leased out, and those redeliveries will fund our scheduled service growth, our passenger network growth going into '26 and '27. So we don't have to buy anything, and we can kind of hold the line on price. But it's been tight out there. Boeing was here yesterday. We were talking about their rate increases. I think the NG availability is going to be mostly dependent on MAX production rates which unfortunately have been slow to kind of pick up. So, I mean, we're not sitting on our hands here. We're looking at hundreds of airplanes literally. And right now, owners of airplanes have better options than to take the Jude Bricker price, I guess.

Our next question comes from the line of James Kirby of JPMorgan.

This is actually Jamie Baker filling in for James. So first question is. Yes, it feels a little weird. So just looking at the fourth quarter schedule on the West Coast, it looks like the capacity cuts there are a little bit steeper than the overall domestic average. Anything to read into West Coast fundamentals from that? Or is that just how it played out as you're pivoting more towards cargo?

There isn't a lot of new information to share. We previously discussed Minneapolis and Los Angeles as weaker markets compared to the rest of our network, and that trend continues. However, when we look at the West Coast as a whole, it includes other areas like Palm Springs, San Diego, San Francisco, Portland, and Sea-Tac, which are not operated in the winter. The Southern California markets outside of Los Angeles are performing very well, especially Palm Springs. The leisure market remains strong, and with little capacity growth, we're seeing it reflected in higher fares, which looks promising.

All right. And then I also had a Boeing question since you brought up the Jude Bricker price. Again, I recognize that you guys are not panning the pavement, but you obviously have your ears to the ground. So how would you describe having that with Boeing, where do you think the market is today relative to however you calculate on an age-adjusted basis, the values that you were able to get coming out of COVID? Because from a timing perspective, it does seem like the uplift on MAXs will provide some relief on the used side by the time that you guys are really out there actively shopping around.

Yes, Jamie, let me expand on that for a moment. We have always viewed an airline in terms of a set of components that contribute to the end-of-life valuation. This has typically been around $2 million for the airframe and $2 million for each engine, totaling about $6 million. Additionally, there's a maintenance value that carries over from the previous operator, which can range from full life to very little remaining. There's also a metric related to operator premiums based on availability. All three of these factors contribute to the assessment. The residual value, which is that $6 million, has remained fairly stable. It's higher than during COVID, but still reasonable. We have sold airframes for around $2.75 million and cores at approximately $3.5 million compared to the previous $2 million. So, there is an increase, but it's still within a reasonable range. The most significant growth we've seen is in the value of engine maintenance transfers, largely due to skyrocketing shop visit costs, which are now about twice what they were at the lowest point during COVID. For context, we managed an engine during COVID for $500 per cycle with no monthly fees, whereas we typically do not lease. In the current market, the inherent cyclic value of engines stands at over $1,000, around $1,100, which shows that this value metric has nearly doubled and constitutes a major part of the value of a used aircraft, presenting a real challenge to the market.

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

This is Ryan Capozzi on for Scott. So just kind of harping on some previously asked questions. But I guess with the reduced scheduled service capacity in MSP, have you seen any degree of backfilling from your competitors in some of your markets?

No, we haven't. I can't think of a single market we serve that has increased capacity in the first quarter. It's been really good. I don't have anything else to add.

Okay. No, that's helpful. And then I guess maybe just building off that, right? As you start to add back some of the scheduled service in 2026, just curious kind of what does that capacity growth look like exactly? Is it just adding back frequencies? Or is there any sort of change to the network strategy next year?

Yes. If we increase fleet utilization to 7.5 hours per day on an annual basis and incorporate all the leased airplanes to reach 50 in passenger operation, that would represent about a 30% growth compared to our current level. We plan to expand next year by recovering what we've previously lost and then going beyond that. The most exciting aspect is that this growth can happen during peak periods. We significantly reduced our September schedule to support cargo growth, and our scheduled service block hours in 2025 for September are less than in 2017 when we operated 40% of the fleet. This reduction is due to limited opportunities during that time. When considering growth, it's encouraging because we can expand with more aircraft and a larger cargo operation to manage both peaks and troughs, allowing us to add capacity in June, July, August, December, and especially March. Although our growth could naturally pressure unit revenues, it should remain fairly subdued since our focus will be on peak periods where demand exceeds supply. Overall, the situation looks very promising for us.

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

I just was thinking about some of your comments on margins and seasonality you've made over the course of the call as they pertain to the first quarter. Schedules are showing capacity down year-over-year in 1Q. So I'm guessing that will put pressure on margins year-over-year, to your point on taking peak flying down as a margin drag. But you're also talking about a lot of momentum on the demand side. I guess, will the capacity cuts just be too difficult to overcome from a year-over-year margin perspective? Or based on what you're seeing today, understanding that could change on the demand side, do you think you could be potentially setting up for margin expansion? Just any clarification.

Absolutely. I want to be very clear. Yes, there are normal inputs like fuel. However, the biggest impact on our scheduled service was in the third quarter of this year, which is now behind us. We're continuing to expand, and by December, our cargo will be fully implemented. From that point on, all additional credit hours will go towards the growth of scheduled service. I believe we should have a favorable situation as we move into 2026, and things look promising for the fourth quarter.

Thank you. I'm showing no further questions at this time. I'll now turn it back to Jude Bricker for closing remarks.

Thanks for joining us today. We're really excited about where we are and where we're headed, and we'll talk to you guys in about 90 days. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.