Executive Summary / Key Takeaways

• Sun Country Airlines operates a unique hybrid model combining scheduled passenger, charter, and cargo services, allowing for dynamic resource allocation and greater resilience compared to traditional carriers.
• The significant expansion of the Cargo segment under the amended Amazon contract, increasing the fleet from 12 to 20 aircraft by Q3 2025, is a primary growth driver, expected to roughly double cargo revenue by September 2025 and contribute nearly 20% of total revenue by 2026.
• Recent financial performance, including record Q1 2025 revenue of $326.6 million and adjusted operating margin of 18.3%, demonstrates the model's profitability, although increased operating expenses (labor, ground handling, airport fees) impacted passenger segment margins.
• The company maintains a strong balance sheet with low leverage (2.0x net debt/adjusted EBITDA as of Q1 2025), ample liquidity ($227.1 million total liquidity in Q1 2025), and a flexible fleet strategy that avoids large future CapEx commitments, supporting high free cash flow generation.
• While scheduled service ASMs are expected to decline 3-5% in 2025 due to resource reallocation to cargo, management anticipates a tailwind for scheduled unit revenues and remains bullish on profitability trends into 2025, leveraging its cost discipline and opportunistic approach in a rationalizing capacity environment.

The Hybrid Advantage: A Differentiated Model Takes Flight

Sun Country Airlines distinguishes itself in the competitive U.S. airline industry through a unique hybrid low-cost model that strategically blends scheduled passenger service, charter operations, and dedicated cargo flights. This approach, refined since the company's origins and significantly bolstered by the establishment of its Cargo segment through a 2019 contract with Amazon (AMZN), allows Sun Country to dynamically deploy its resources – particularly its Boeing (BA) 737-NG fleet and flight crews – across these distinct business lines. The core strategic advantage lies in this flexibility, enabling the airline to chase peak demand in its leisure-focused scheduled network while leveraging the predictable, contractual revenue streams from its charter and cargo operations to mitigate the inherent seasonality and cyclicality of air travel. This synergistic model is designed not just for growth, but for delivering high margins and robust cash flows with greater resilience than carriers reliant solely on traditional scheduled service.

The company's operational "technology," while not involving proprietary aircraft design, centers on sophisticated scheduling and resource allocation algorithms that optimize fleet and crew utilization across segments. This operational agility is a key differentiator, allowing Sun Country to quickly pivot capacity in response to market shifts or unexpected events. Furthermore, the company's reliance on the mature, reliable Boeing 737-NG fleet provides an advantage in the current environment, avoiding the operational disruptions and out-of-service issues faced by some competitors utilizing newer, less proven aircraft technologies. Passenger experience is enhanced through features like state-of-the-art interiors, complimentary in-flight entertainment streaming, seat reclining, and seat-back power, aiming to attract and retain leisure travelers. The recent implementation of a Pilot Bidding System (PBS) further refines operational efficiency by improving crew scheduling.

In the broader competitive landscape, Sun Country's hybrid model positions it uniquely. Against traditional low-cost carriers like Southwest (LUV), Spirit, and Frontier, Sun Country shares a focus on cost efficiency (demonstrated by its competitive Adjusted CASM) but differentiates through its significant charter and cargo businesses, which provide revenue diversity and stability absent in passenger-only models. Compared to mainline carriers like Delta (DAL), United (UAL), and American (AAL), Sun Country operates a simpler, lower-cost structure and focuses on specific leisure and VFR markets rather than extensive global networks or premium services. While larger carriers benefit from scale and network effects, Sun Country's agility and niche focus allow it to target specific profitable routes and customer segments, often achieving superior operating margins (18.3% adjusted operating margin in Q1 2025) relative to its size. The company's strong brand presence in its home market of Minneapolis also provides a competitive moat.

Operational Strength and Financial Performance

Sun Country's operational execution is critical to its model. The company consistently reports strong operational metrics, including high controllable completion factors and low mishandled bag rates, essential for maintaining customer satisfaction in a low-frequency network. The fleet, consisting of 66 Boeing 737-NG aircraft as of March 31, 2025 (45 passenger, 15 cargo for Amazon, 6 leased out), is managed opportunistically, avoiding large, rigid order books and instead leveraging owned aircraft and market opportunities for growth.

Recent financial results highlight the model's performance and the ongoing strategic shifts. In the first quarter of 2025, total operating revenues reached a record $326.6 million, a 5% increase year-over-year. This growth was primarily driven by the Passenger segment (up 4% to $285.9 million) and the Cargo segment (up 18% to $28.2 million). Within the Passenger segment, Charter revenue saw a significant 16% increase to $54.7 million, benefiting from a 4% rise in revenue per block hour and an 11% increase in block hours, including strong ad hoc flying. Scheduled Service revenue grew a modest 2% to $143.5 million, but operational growth (7% ASM increase) outpaced demand, leading to a 5% decline in TRASM and a 3.9 percentage point drop in load factor.

Operating expenses increased 5% year-over-year in Q1 2025 to $270.4 million. Key cost pressures included a 13% increase in Salaries, Wages, and Benefits ($92.8 million) due to headcount growth supporting operations and contractual rate increases for pilots, flight attendants, and dispatchers. Ground Handling costs rose 25% ($11.4 million) and Landing Fees and Airport Rent increased 14% ($16.8 million), driven by increased departures and market rate pressures. Maintenance expense was up 12% ($18.9 million) due to fleet growth, non-routine events, and higher rates. These increases were partially offset by an 8% decrease in Aircraft Fuel expense ($64.6 million) due to lower fuel prices. Adjusted CASM, excluding fuel and cargo costs, increased by 3.5% year-over-year in Q1 2025, reflecting the impact of increased labor costs and operational expenses.

Despite cost pressures, the company reported Operating Income of $56.2 million in Q1 2025, up 2% year-over-year, resulting in an operating margin of 17.2%. Net Income was $36.5 million, up 3%, with diluted EPS of $0.66. Adjusted Net Income was $39.7 million, or $0.72 per diluted share. The Cargo segment saw its operating income improve to $1.5 million, driven by contractual rate escalations and the addition of new aircraft.

Capital Strength and Strategic Growth

Sun Country maintains a strong balance sheet, a key component of its resilience. As of March 31, 2025, total liquidity stood at $227.1 million, comprising cash and cash equivalents ($53.4 million) and short-term investments ($105.4 million), supplemented by $75 million available under a new Revolving Credit Facility executed in March 2025. This facility, which replaced a smaller prior one, enhances financial flexibility and is secured by certain aircraft. The company was in compliance with all financial covenants as of the reporting date.

The company's debt profile is managed conservatively. Total Debt, net, and Lease Obligations decreased to $598.8 million as of March 31, 2025. The net debt to adjusted EBITDA ratio improved to 2.0x in Q1 2025 from 2.4x a year prior, reflecting strong EBITDA generation and debt management. The company expects to pay $108 million towards debt obligations in 2025. Capital expenditures for 2025 are projected between $70 million and $80 million, primarily allocated to spare engines, induction costs for the new cargo aircraft, and aircraft returning off lease. Notably, the company does not require significant CapEx for fleet growth through 2027, as this growth will come from owned aircraft currently leased to other carriers and the committed Amazon cargo deliveries.

The strategic pivot towards the Cargo segment is a central theme for 2025. The Amended and Restated Air Transportation Services Agreement (AR ATSA) with Amazon commits to increasing the cargo fleet from 12 to 20 Boeing 737-800 freighters. Three of these additional aircraft were received in Q1 2025, with one already in service. The remaining five are expected to be delivered and enter service by the end of Q3 2025. This expansion, coupled with contractual rate escalations, is projected to roughly double cargo revenue by September 2025 compared to the prior year. This predictable, contractual revenue stream provides a valuable buffer against potential volatility in the passenger market.

As a consequence of allocating pilot resources to the growing cargo operation, Sun Country expects full-year 2025 scheduled service ASMs to decline between 3% and 5%, with reductions concentrated from Q2 through Q4. While this temporary reduction in scale is anticipated to put pressure on adjusted CASM, management views this as a necessary trade-off to absorb the profitable cargo opportunity. They expect this capacity rationalization, combined with a generally improving industry capacity environment, to provide a tailwind for scheduled service unit revenues on a year-over-year basis through at least the first quarter of 2026. The Charter segment is also expected to perform well, benefiting from available aircraft and crew time.

Beyond the cargo ramp, future passenger fleet growth is planned through the redelivery of six owned 737-900ERs currently on lease to unaffiliated airlines, expected primarily in late 2025 and 2026. These aircraft will support passenger growth in 2026 and 2027 without requiring new purchases until the company looks towards 2027 capacity needs. The company's opportunistic approach to fleet management and strong balance sheet provide headroom to potentially take advantage of future market opportunities, including additional share repurchases, following a recent $25 million authorization.

Competitive Positioning and Risks

Sun Country operates in a dynamic and highly competitive industry. Its hybrid model provides a distinct advantage, allowing it to outperform peers, particularly during periods of industry stress, due to the stability offered by its contractual cargo and charter businesses. While other domestic leisure carriers faced significant pressure from industry overcapacity in 2024, Sun Country's ability to rapidly adjust scheduled capacity and lean on its diversified segments helped it maintain profitability. The company's cost discipline and focus on profitable routes differentiate it from larger network carriers and pure LCCs.

However, the company is not immune to industry risks. Macroeconomic conditions, volatile fuel prices, and changes in the competitive environment (including capacity decisions by other carriers) can impact results. Operational challenges, such as those experienced in Q1 2025 with ground handling and airport costs, can pressure expenses. Labor costs are increasing due to new collective bargaining agreements. OEM delays and tightness in the NG components market pose potential operational risks, although the company's reliance on its existing, reliable fleet mitigates some of the issues faced by operators of newer aircraft. The IRS audit regarding excise taxes on seat selection charges represents a potential, though currently assessed as not probable, financial contingency.

The successful execution of the Amazon cargo expansion is critical to the near-term outlook. While the contractual nature provides predictability, the process of inducting aircraft and allocating resources involves temporary cost pressures and operational complexities. The company's ability to manage this transition efficiently while maintaining operational reliability across all segments will be key to realizing the full benefits of this strategic shift.

Conclusion

Sun Country Airlines presents a compelling investment thesis built upon its differentiated and resilient hybrid business model. The strategic expansion of the high-margin, predictable Cargo segment, fueled by the Amazon partnership, is poised to significantly enhance revenue diversity and profitability in 2025 and beyond. While this transition necessitates a temporary reduction in scheduled service capacity and may introduce some near-term cost pressures, the underlying rationale – allocating resources to more profitable and stable flying – is sound and expected to yield long-term benefits, including a tailwind for scheduled unit revenues.

Backed by a strong balance sheet, low leverage, and a flexible fleet strategy that minimizes future CapEx needs, Sun Country is well-positioned to generate substantial free cash flow. The company's ability to opportunistically manage its fleet and capital structure, coupled with its proven cost discipline and operational agility, provides a solid foundation for navigating the dynamic airline industry. Investors should monitor the execution of the cargo ramp, the impact of labor costs, and the broader demand environment, but the strategic direction and financial discipline evident in recent results underscore the potential for continued industry-leading profitability and value creation.