Executive Summary / Key Takeaways

• Strategic Cargo Transformation: Sun Country is sacrificing near-term passenger capacity to rapidly scale its Amazon cargo business from 12 to 20 aircraft, a move that will roughly double cargo revenue by late 2025 and drive a projected $300 million EBITDA run-rate by Q2 2027, fundamentally altering the company's earnings quality.

• Minneapolis Fortress Consolidation: As Spirit Airlines enters bankruptcy and Frontier Group retreats from Minneapolis, Sun Country's home market is becoming a two-airline duopoly with Delta , creating pricing power that should manifest in passenger segment margins once cargo expansion is complete.

• Temporary Margin Compression, Permanent Improvement: Q3 2025 operating margins compressed to 3.9% due to pilot staffing surpluses and capacity shifts, but this represents the final phase of transition costs. Management expects CASM ex-fuel to flatten by mid-2026 as the cargo fleet reaches mature utilization.

• Financial Flexibility During Transition: With $299 million in total liquidity, declining net debt, and strong free cash flow generation, Sun Country has the balance sheet strength to execute this pivot while returning $20 million to shareholders via buybacks year-to-date.

• Execution Risks Are The Variable: The thesis hinges on three factors: successful cargo aircraft induction (slower than expected in Q3), resolving pilot captain upgrade constraints limiting 2026-2027 capacity, and navigating potential macro headwinds from tariffs on leisure demand.

Setting the Scene: The Hybrid Airline Advantage

Sun Country Airlines Holdings, founded in 1983 and headquartered in Minneapolis, Minnesota, operates a business model that is unique among U.S. carriers. While most airlines fit neatly into categories—low-cost carrier, ultra-low-cost carrier, legacy network carrier—Sun Country has evolved into a hybrid operator that dynamically deploys shared resources across three distinct segments: scheduled passenger service, charter operations, and cargo flying for Amazon . This structure is not a historical accident but a deliberate strategy to build resilience against the cyclicality and volatility that plague pure-play passenger airlines.

The airline industry in 2025 is experiencing profound disruption. Spirit Airlines has entered its second Chapter 11 bankruptcy, Frontier Group posted a $77 million loss in Q3 while cutting capacity, and Southwest slashed its earnings forecast by 40% due to demand weakness. Against this backdrop, Sun Country's model looks increasingly differentiated. The company has delivered 13 consecutive profitable quarters on an adjusted net income basis, a streak that spans the post-pandemic recovery, fuel price volatility, and shifting consumer demand patterns.

Minneapolis-St. Paul International Airport serves as Sun Country's strategic anchor. The company holds approximately 12% market share in its home base, a position that is strengthening as competitors retreat. Spirit Airlines is pulling back from MSP routes, Frontier Group has announced capacity reductions, and Allegiant never established a meaningful presence. This is creating a two-airline market structure with Delta , a dynamic that historically yields pricing power for the remaining carriers. Sun Country's ability to maintain this fortress hub while expanding its cargo business provides the stable foundation from which to execute its current transformation.

Business Model & Strategic Differentiation

Sun Country's hybrid model generates revenue from three distinct sources, each with different margin profiles and cyclicality. The passenger segment comprises scheduled service to leisure destinations, ad-hoc charter flying for the Department of Defense and sports teams, and ancillary fees. The cargo segment operates under a Crew, Maintenance, and Insurance (CMI) agreement with Amazon , flying a dedicated fleet of 737-800 freighters on schedules determined by the e-commerce giant. A small "Other" segment includes vacation packages and credit card revenue.

This diversification is the company's primary moat. While pure-play passenger airlines like Spirit Airlines and Frontier Group face margin compression when leisure demand softens, Sun Country can shift capacity between segments. In Q3 2025, scheduled service ASMs declined 10% year-over-year as the company reallocated pilot resources to support cargo expansion. Simultaneously, charter revenue increased 16% to a record $58.7 million, driven by an 11% increase in block hours and a 4% improvement in revenue per block hour. This flexibility allows Sun Country to optimize profitability across the cycle rather than being captive to a single demand stream.

The cargo expansion represents the most significant strategic shift in the company's recent history. In June 2024, Sun Country amended its Amazon agreement to increase the cargo fleet from 12 to 20 aircraft by 2025. By Q3 2025, all 20 aircraft were in operation, representing a 14% increase in the total fleet. The economics are compelling: cargo revenue grew 51% in Q3 to $44 million, and management projects it will roughly double compared to the prior-year period by September 2025. The CMI model provides predictable cash flows with a fixed margin component plus variable cost coverage, meaning Sun Country gets paid regardless of load factors.

Technology and operational efficiency initiatives support this model. The company is implementing a Preferential Bidding System (PBS) in Q3 2025 to optimize crew rostering and plans to open its first non-Minneapolis pilot base in Cincinnati to support the cargo operation. These investments increase pilot utilization and reduce the cost per block hour, directly addressing the capacity constraints that currently limit growth.

Financial Performance as Evidence of Strategy

Sun Country's Q3 2025 results provide clear evidence that the cargo pivot is working, albeit with temporary margin pressure. Total operating revenue increased 2% to $255.5 million despite a 3% decline in passenger revenue. The cargo segment's 51% growth offset scheduled service capacity cuts, demonstrating the diversification benefit. Charter revenue's 16% increase to a record level further validated the hybrid model's resilience. Operating income declined 20.9% to $9.7 million, and operating margin compressed to 3.9% from 4.9% in Q3 2024. This compression is not a sign of structural deterioration but rather the cost of rapid transformation. Salaries, wages, and benefits increased 15% due to an 11% increase in headcount and pilot contractual rate increases. Maintenance expense rose 13% due to fleet growth and strategic pulling-forward of heavy maintenance from 2026 to stabilize future costs. These are investments in future capacity, not permanent cost inflation.

The balance sheet tells a more important story. Total liquidity stands at $298.7 million. Net debt has declined from $438.2 million at the start of 2025 to $406.1 million at quarter-end. The company generated $42 million in operating cash flow and $34 million in free cash flow in Q3, demonstrating that the cargo expansion is cash-generative even during the transition phase.

Capital allocation reflects management's confidence. Sun Country repurchased $10 million of stock in Q3 and $20 million year-to-date, with $15 million remaining under authorization. The company also executed a new $108 million term loan facility at a fixed 5.98% rate to refinance higher-cost debt, reducing interest expense by 17% in Q3. These actions signal that management believes the stock is undervalued relative to the earnings power that will emerge post-transition.

Competitive Context: Exploiting Industry Disruption

Sun Country's competitive positioning has strengthened materially as industry distress creates opportunities. The company's primary ultra-low-cost competitors are in disarray. Spirit Airlines 's bankruptcy has led to route cuts including from Minneapolis, while Frontier Group 's $77 million Q3 loss and capacity reductions have caused it to pull back from MSP. Southwest 's 40% earnings forecast cut reflects broader leisure demand weakness, but Sun Country's diversified model insulates it from these pressures.

The Minneapolis market structure evolution is particularly valuable. As Spirit Airlines and Frontier Group retreat, Sun Country and Delta (DAL) are becoming the two dominant carriers. This duopoly dynamic typically enables rational pricing and reduces the destructive fare wars that plague fragmented markets. Sun Country's Q3 scheduled service TRASM increased 2% despite a 10% ASM decline, and management expects Q4 TRASM to be up over 6% year-over-year. This pricing power should accelerate as competitors cede ground.

Charter revenue growth of 16% in Q3 highlights another competitive advantage. While pure-play passenger airlines depend entirely on discretionary leisure demand, Sun Country's charter business provides stable, non-cyclical revenue from the Department of Defense and sports teams. This segment generated $58.7 million in Q3 with 4% year-over-year improvement in revenue per block hour, demonstrating pricing power in a specialized niche.

The cargo agreement with Amazon creates a barrier to entry that competitors cannot easily replicate. Building a CMI operation requires regulatory certification, pilot training, and operational expertise that take years to develop. Sun Country's first-mover advantage and six-year contract extension through 2031 lock in a stable revenue stream while competitors fight for shrinking passenger market share.

Outlook, Guidance, and Execution Risk

Management's guidance reveals a clear path to margin inflection and earnings power. Q4 2025 revenue is projected between $270-280 million on 8-11% block hour growth, with operating margins of 5-8%. TRASM is expected to increase over 6% year-over-year, with Q1 2026 advances "even stronger." These projections imply that the worst of the margin compression is behind us.

The cargo fleet is now at its full 20-aircraft complement, and management expects revenue to increase from 60% year-over-year in September to over 75% by December based on the current schedule. The fixed-plus-variable contract structure means that as utilization matures, margins should expand naturally. By Q2 2027, management projects a $300 million EBITDA run-rate from the current fleet, representing a dramatic improvement from the $52.9 million annual EBITDA implied by Q3's quarterly results.

Scheduled service capacity cuts will reverse beginning in 2026. Management expects positive year-over-year ASM growth by Q3 2026, with the passenger fleet expanding to 50 aircraft by mid-2027 as owned 737-900ERs return from lease. This growth will be funded by existing owned aircraft currently on lease to other carriers, requiring minimal capital expenditure. The company does not maintain an order book, instead acquiring aircraft opportunistically—a strategy that has allowed it to avoid the overcapacity plaguing competitors.

Execution risks remain tangible. Pilot staffing constraints, particularly captain upgrades, are the limiting factor for long-range planning into 2026 and 2027. The company is addressing this through PBS implementation and new base openings, but the constraint could delay capacity restoration. Maintenance costs are elevated due to unplanned events and strategic pulling-forward of heavy checks, though this should stabilize the fleet and reduce 2026 expense.

Macroeconomic uncertainty presents the largest external risk. CEO Jude Bricker expressed concern that tariffs could squeeze discretionary leisure spending, putting downward pressure on demand. However, Sun Country's peak-period focus and MSP fortress market should mitigate this impact relative to competitors. The company is also "right-sized" for a demand slowdown, having already cut capacity to support cargo growth.

Valuation Context: Pricing in Transition

At $14.86 per share, Sun Country trades at 14.16 times trailing earnings, 5.67 times EV/EBITDA, and 5.88 times price-to-free-cash-flow. These multiples are significantly below the company's historical trading range and peer averages, reflecting investor skepticism about the cargo transition's near-term margin impact.

Comparing Sun Country to distressed ultra-low-cost carriers highlights its relative strength. Frontier Group (ULCC) trades at a negative operating margin of -16.25% with debt-to-equity of 11.59, while Spirit Airlines (SAVE)'s bankruptcy has rendered traditional valuation metrics meaningless. Allegiant (ALGT)'s operating margin is -4.22% with a price-to-free-cash-flow ratio of 176.80, reflecting its own operational challenges. Southwest (LUV) trades at a premium 63.66 P/E but is cutting earnings guidance due to demand weakness.

Sun Country's balance sheet strength further distinguishes it. The company's debt-to-equity ratio of 0.94 is conservative for an airline, and its net debt is declining while peers struggle with liquidity. The 9.99% return on equity and 4.29% return on assets demonstrate efficient capital deployment during the transition period.

The valuation appears to price Sun Country as a traditional low-cost carrier rather than the diversified logistics platform it is becoming. If management achieves its $300 million EBITDA target by Q2 2027, the current enterprise value of $1.19 billion implies a multiple of less than 4x forward EBITDA—a significant discount to the 9-12x multiples typical for asset-light logistics companies.

Conclusion: A Transitional Story with Asymmetric Upside

Sun Country Airlines is executing a strategic transformation that will fundamentally improve its earnings quality and competitive position. The cargo expansion with Amazon (AMZN) creates a predictable, high-margin revenue stream that diversifies the company away from volatile leisure demand. Simultaneously, industry consolidation in Minneapolis is creating a duopoly market structure that should yield pricing power as capacity returns in 2026.

The temporary margin compression seen in Q3 2025 represents the final investment phase of this transition. Pilot staffing surpluses, maintenance pull-forwards, and capacity sacrifices have created a margin trough that should inflect as cargo utilization matures and passenger growth resumes. Management's guidance for Q4 2025 and 2026 suggests this inflection is imminent.

The investment case hinges on execution of three variables: successful integration of the full cargo fleet, resolution of pilot captain upgrade constraints, and navigation of potential macro headwinds. The company's strong liquidity position and proven ability to generate free cash flow provide a buffer against execution missteps.

Trading at 14x earnings and less than 6x free cash flow, Sun Country's valuation does not reflect the $300 million EBITDA run-rate potential by 2027. For investors willing to look through the transition noise, the combination of a strengthening competitive moat, improving industry structure, and underappreciated earnings power creates an attractive risk-reward profile. The story is not about navigating industry headwinds, but rather exploiting them to build a more durable airline.