Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) is a new breed of hybrid low-cost air carrier that dynamically deploys shared resources across its synergistic Scheduled Service, Charter, and Cargo businesses. The company's diversified business model, unique in the airline industry, has allowed it to reliably deliver industry-leading profitability throughout all cycles.

In the first quarter of 2024, Sun Country reported record quarterly revenue of $311.5 million, up 5.9% year-over-year. Net income for the quarter was $35.3 million, with an adjusted operating margin of 18.2%. For the full year 2023, the company reported annual revenue of $1,049.6 million and net income of $72.2 million, with annual operating cash flow of $174.1 million and free cash flow of -$44.0 million.

Business Overview

Sun Country is based in Minnesota and focuses on serving leisure and visiting friends and relatives (VFR) passengers, Charter customers, and providing crew, maintenance, and insurance (CMI) service to Amazon, with flights throughout the U.S. and to destinations in Canada, Mexico, Central America, and the Caribbean. The company shares resources, such as flight crews, across its Scheduled Service, Charter, and Cargo business lines to generate high returns and margins and mitigate the seasonality of its route network.

Sun Country's Scheduled Service business combines low costs with a high-quality product to generate higher Total Revenue per Available Seat Mile (TRASM) than Ultra Low-Cost Carriers (ULCCs) while maintaining lower Adjusted Cost per Available Seat Mile (CASM) than Low Cost Carriers (LCCs), resulting in best-in-class unit profitability. The company's Charter business is one of the largest narrow-body Charter operations in the United States and provides inherent diversification and downside protection. Sun Country's Cargo business, which includes flying 12 Boeing 737-800 cargo aircraft for Amazon under the Air Transportation Services Agreement (ATSA), enables the company to leverage certain assets, capabilities, and fixed costs to enhance profitability and promote growth across the organization.

Financials

In the first quarter of 2024, Sun Country's total operating revenues increased 5.9% year-over-year to $311.5 million, driven by growth in both its Scheduled Service and Cargo segments. Scheduled Service revenue, including Ancillary revenue, grew 2.8% to $227.4 million, while Cargo revenue increased 2.5% to $23.9 million. The company's Charter revenue grew 2.4% to $47.3 million.

The company's first quarter adjusted operating margin of 18.2% was at the lower end of its expectations, primarily due to a weaker-than-expected close-in March bookings and industry-wide capacity growth in its largest markets. Sun Country's management team noted that the company will make significant capacity adjustments in the September through November period, with some of that displaced capacity being allocated to its Charter and Cargo segments.

For the second quarter of 2024, Sun Country expects total revenue to be between $255 million and $265 million, with an operating margin between 4% and 7%. The company anticipates its cost per gallon for fuel to be $2.93 during the quarter.

Financial Condition and Liquidity

As of March 31, 2024, Sun Country had total liquidity of $179 million, which includes $28.4 million in cash and cash equivalents and $132.8 million in short-term investments. The company's net debt to adjusted EBITDA ratio at the end of the first quarter was 2.5x, indicating a strong balance sheet and financial flexibility.

Sun Country does not expect to purchase any incremental aircraft until it begins looking for 2026 capacity, and it anticipates full-year 2024 capital expenditures to be well below $100 million. The company's management team highlighted that it has the flexibility to deploy its cash in a manner that maximizes profitability and minimizes earnings volatility, with opportunities to allocate capacity between its Scheduled Service, Charter, and Cargo segments.

Operational Excellence and Competitive Advantages

Operational excellence is a core tenet of Sun Country's product, which is critical to its Scheduled Service customers and justifies its growth with Charter and Cargo customers. In the first quarter of 2024, the company had the best completion factor among the 11 public mainline carriers at 99.7%.

Sun Country's diversified business model, which includes a focus on leisure and VFR passengers, Charter, and Cargo service, is unique in the airline sector and mitigates the impact of economic and industry downturns on its business when compared to other large U.S. passenger airlines. The company's flexible business model allows it to adjust its services in response to market conditions, targeting the highest possible returns.

Risks and Challenges

Sun Country's business is subject to various risks, including volatile fuel prices, macroeconomic conditions, and the impact of airline bankruptcies, restructurings, or consolidations. The company's operations are also susceptible to weather-related disruptions and the potential impact of U.S. military actions or acts of terrorism.

Additionally, the airline industry is highly competitive, and Sun Country faces competition from both legacy carriers and other low-cost airlines. The company's ability to maintain its cost advantage and operational excellence is crucial to its long-term success.

Conclusion

Sun Country Airlines' diversified business model, operational excellence, and financial strength position the company well to navigate the challenges facing the airline industry. The company's unique approach to resource sharing and capacity allocation across its Scheduled Service, Charter, and Cargo segments has allowed it to deliver industry-leading profitability throughout various market cycles. While the company faces near-term headwinds from industry-wide capacity growth, its management team's focus on flexibility and cost control should enable Sun Country to continue generating strong returns for shareholders.