Business Overview and History

Sun Country Airlines (NASDAQ: SNCY) is a hybrid low-cost carrier that has carved out a unique niche in the highly competitive airline industry. By dynamically deploying its resources across scheduled service, charter, and cargo operations, Sun Country has demonstrated its ability to weather industry headwinds and deliver consistent profitability.

Sun Country was founded in 1983 as a charter airline based in Bloomington, Minnesota, initially focusing on providing charter flights to vacation destinations in the United States and the Caribbean. The company gradually expanded its route network and passenger service while maintaining its charter business over the next couple of decades. In the early 2000s, Sun Country faced significant challenges, including financial difficulties that led to filing for bankruptcy protection in 2008. However, the company successfully restructured and reemerged from bankruptcy in 2011 under new ownership. This new leadership shifted Sun Country's business model to become a hybrid low-cost carrier, offering a blend of low fares and additional amenities compared to ultra-low-cost competitors.

Throughout the 2010s, Sun Country continued to grow, expanding its scheduled passenger service and establishing new hubs outside of its Minneapolis base, including service from airports in cities like Los Angeles, Las Vegas, and Cancun. In 2019, the company made a strategic move by entering the air cargo market, signing a long-term contract to provide services for Amazon. This diversification proved beneficial, especially during the challenges posed by the COVID-19 pandemic in 2020 and 2021.

In 2021, Sun Country achieved a significant milestone by going public on the Nasdaq stock exchange, raising over $200 million in an initial public offering. This provided the company with additional capital to fund its growth initiatives. Despite the various obstacles faced throughout its history, including bankruptcy and industry downturns, Sun Country's flexible business model, focus on cost control, and diversified revenue streams have allowed it to navigate these challenges and emerge as a profitable, growing player in the U.S. airline industry.

Financial Overview

Sun Country's financial performance has been impressive, particularly in the face of industry challenges. For the fiscal year 2023, the company reported revenue of $1.05 billion and net income of $72.18 million, representing a net profit margin of 6.9%. The company's strong financial position is further evidenced by its healthy liquidity, with $187.41 million in cash, cash equivalents, and short-term investments as of December 31, 2023.

The company's diversified business model has contributed to its resilience. In the third quarter of 2024, Sun Country reported total revenue of $249.5 million, with its cargo and charter segments partially offsetting the impact of industry overcapacity on its scheduled service business. The company's adjusted operating margin for the quarter was 5.6%, demonstrating its ability to navigate challenging market conditions.

Looking at the most recent quarter (Q3 2024), Sun Country reported revenue of $249.47 million, net income of $2.34 million, operating cash flow of $35.43 million, and free cash flow of $31.05 million. The year-over-year revenue growth was approximately 0.2%, primarily driven by a 12% increase in cargo revenue, partially offset by a 3% decline in passenger revenue. The passenger revenue decline was due to an 8% decrease in total fare per passenger, which was impacted by increased industry capacity.

Sun Country's business is divided into three main segments: Passenger, Cargo, and Other. The Passenger segment, which includes Scheduled Service, Charter, and Ancillary revenue, saw a 3% decrease in revenue for Q3 2024 compared to the same period in 2023. The Cargo segment, which includes revenue from flying cargo aircraft for Amazon.com Services, Inc., increased 12% in the same period. The Other segment, consisting primarily of revenue from Sun Country Vacations products and rental revenue, increased 48% year-over-year.

Liquidity

Sun Country's liquidity position remains strong, with $187.41 million in cash, cash equivalents, and short-term investments as of December 31, 2023. This robust liquidity provides the company with financial flexibility to weather potential industry downturns and invest in growth opportunities.

As of the most recent quarter, Sun Country's debt-to-equity ratio stood at 1.22, with $56.79 million in cash and cash equivalents. The company has an available credit line of $24.74 million out of a $25 million Revolving Credit Facility. The current ratio is 0.65, and the quick ratio is 0.62, indicating a relatively tight liquidity position in the short term.

Key Drivers and Challenges

Sun Country's success can be attributed to its focus on optimizing capacity, leveraging its flexible operational model, and capitalizing on the growth of its cargo and charter segments. The company's ability to shift flying to markets with peak demand and away from low-demand periods has been a key competitive advantage.

However, Sun Country is not immune to industry-wide challenges. The company has faced volatility in fuel prices, which can have a significant impact on its operating costs. Additionally, the company's reliance on a single-fleet type of Boeing 737 aircraft exposes it to risks related to aircraft availability and manufacturer issues.

The company's cargo segment has been a significant driver of growth, with the recent expansion of its agreement with Amazon playing a crucial role. As Sun Country takes on additional cargo aircraft in 2025, this segment is expected to contribute an increasingly larger share of the company's overall revenue and profitability.

Geographic Markets and Industry Trends

Sun Country primarily serves domestic US markets, with some service to Latin America. Over 95% of revenue is generated from domestic operations. This focus on the domestic market has allowed the company to capitalize on the strong recovery in US leisure travel demand.

The US airline industry has seen a compound annual growth rate (CAGR) of 6-8% in revenue over the past 5 years. Sun Country has positioned itself well within this growing market, particularly by focusing on leisure and VFR (visiting friends and relatives) passengers, as well as its charter and cargo operations.

Outlook and Conclusion

Sun Country's outlook remains positive, with the company anticipating continued growth in its cargo and charter segments. The company's scheduled service business is also expected to benefit from industry capacity reductions, leading to improved unit revenue performance.

For Q4 2024, Sun Country expects total revenue between $250 million and $260 million, block hour growth of 2% to 5%, fuel cost per gallon of $2.47, and an operating margin between 7% and 9%. The company anticipates scheduled service TRASM (Total Revenue per Available Seat Mile) to be flat year-over-year in Q4 2024, with total TRASM (including charter) expected to increase by low single digits.

Looking ahead to 2025, Sun Country plans to reduce scheduled service capacity to support the growth in its cargo business, with the shrinkage expected to be in the mid-single digit range. The company remains bullish on unit revenue trends and expects only modest ex-fuel unit cost increases going forward.

For the full year 2024, Sun Country anticipates capital expenditures of approximately $75 million and expects to finish the year with a net debt to adjusted EBITDA ratio of 2.3x.

Despite the challenges faced by the airline industry, Sun Country has demonstrated its ability to adapt and deliver consistent profitability. Its unique hybrid business model, diversified revenue streams, and focus on operational efficiency have positioned the company as a resilient player in the highly competitive airline landscape. With nine consecutive quarters of profitability and a strong outlook for its cargo and charter businesses, Sun Country appears well-positioned to continue its growth trajectory in the coming years.