Executive Summary / Key Takeaways

• Sun Country Airlines ($SNCY) leverages a unique hybrid low-cost model, synergistically deploying resources across its passenger (scheduled and charter) and rapidly expanding cargo segments, driving consistent profitability and resilience against industry shocks.
• The company is in a strategic transition, completing a significant expansion of its cargo fleet to 20 Boeing 737-800 aircraft for Amazon by late August 2025, which is projected to roughly double cargo revenue year-over-year by Q4 2025.
• Despite temporary unit cost pressures from this cargo ramp-up and a planned reduction in scheduled service capacity in 2025, robust demand and strategic capacity allocation are driving strong Total Revenue per Available Seat Mile (TRASM) improvements, with Q4 2025 TRASM expected up over 6% and Q1 2026 advances even stronger.
• Sun Country targets approximately $1.5 billion in revenue, $300 million in EBITDA, and $2.50 in EPS by Q2 2027, primarily by re-growing its passenger fleet to 50 aircraft using owned, returning leased aircraft, and increasing utilization without new acquisitions.
• The company maintains a strong balance sheet and significant liquidity, enabling opportunistic capital allocation towards share repurchases and potential industry consolidation, while its operational model and proven 737-NG fleet provide a competitive moat against market volatility and new technology risks.

The Hybrid Advantage: A Differentiated Model Takes Flight

Sun Country Airlines, founded in 1983 and headquartered in Minneapolis, Minnesota, operates as a distinctive hybrid low-cost air carrier. Its core strategy revolves around the dynamic and synergistic deployment of shared resources across its Passenger (Scheduled Service and Charter) and Cargo segments. This model is designed to generate high growth, strong margins, and robust cash flows, providing greater resilience against market fluctuations and industry shocks than traditional airline models. The company's operational flexibility, rooted in its ability to reallocate aircraft and crew, is a foundational strength that underpins its consistent profitability.

A pivotal strategic move was the December 2019 signing of a six-year Air Transportation Services Agreement (ATSA) with Amazon (AMZN), marking Sun Country's entry into dedicated air cargo. This partnership was significantly expanded in June 2024 with the Amended and Restated Air Transportation Services Agreement (AR ATSA), committing to an increase in the cargo fleet from 12 to 20 Boeing 737-800 aircraft by 2025. This expansion is central to the company's current strategic focus, temporarily influencing its passenger operations as resources are reallocated.

Technological and Operational Differentiators

Sun Country's competitive edge is not derived from proprietary aircraft technology, but rather from its astute operational model and fleet strategy, leveraging its reliable Boeing 737-NG aircraft. The fleet, comprising 65 Boeing 737-800s and five Boeing 737-900ERs as of September 30, 2025, is a proven workhorse, allowing the company to avoid the "out-of-service issues that other airlines are dealing with associated with the new technology equipment." This reliance on a mature, dependable fleet contributes to operational stability and predictable maintenance.

The company's "dynamically and synergistically deploys shared resources" across its segments, a business model innovation that offers tangible benefits. This flexibility allows Sun Country to adjust services rapidly in response to market conditions, mitigating the impact of cyclical downturns. For instance, crew can be utilized in the Cargo segment when the Passenger business is less profitable. This strategic agility translates into a "low fixed cost model" and a "safe and reliable network with 3Q controllable completion factor of 99.3%."

Recent technological enhancements further bolster operational efficiency. The implementation of a Preferential Bidding System (PBS) for crew rostering in October 2025 is expected to "drive a lot of efficiency." Additionally, the launch of a new co-branded credit card program with Synchrony (SYF) in Q3 2025 is a strategic move to enhance customer loyalty and diversify revenue streams, projected to generate approximately $20 million annually at full implementation. These initiatives collectively strengthen Sun Country's competitive moat by optimizing costs, enhancing operational flexibility, and boosting ancillary revenue.

Competitive Landscape and Strategic Positioning

Sun Country operates within a highly competitive airline industry, facing direct competition from ultra-low-cost carriers (ULCCs) like Spirit Airlines (SAVE), Frontier Group (ULCC), and Allegiant Travel (ALGT), as well as low-cost carrier JetBlue Airways (JBLU). However, its hybrid model provides a distinct advantage. While competitors like Spirit and Frontier focus predominantly on passenger volume, Sun Country's diversified revenue streams from scheduled, charter, and cargo services offer greater resilience and adaptability.

The Minneapolis-St. Paul International Airport (MSP) serves as Sun Country's home base, where it enjoys a strong competitive position. The market is transitioning to a "2-airline market" with the departure of Allegiant and Spirit, leaving Sun Country and Delta Air Lines (DAL). Sun Country is not capacity-constrained at MSP, possessing ample gate space and the ability to park aircraft as needed, a significant strategic advantage. This allows the company to focus on being "relevant in this community" and the "carrier of choice" for non-stop leisure travel to destinations like Mexico, South Florida, and the Caribbean.

The cargo business, operating on a Crew, Maintenance, and Insurance (CMI) model for Amazon, provides predictable, high-margin revenue. The contract structure ensures Sun Country is compensated with a fixed rate per aircraft plus a block hour rate, with variable costs passed through. This means that "lower utilization of the cargo fleet, the better the margins are for us" as pilot capacity can be redeployed to higher-margin passenger flying. This insulates Sun Country from the direct impacts of cargo volume fluctuations or tariffs, a key differentiator from other freight operators.

The charter segment, encompassing military, collegiate sports, and casino operations, further enhances flexibility. Sun Country's ability to "flex capacity between charter and scheduled service continues to be a competitive advantage, especially in this environment." This was evident in Q3 2025, where a 15.6% increase in charter revenue, driven by a surge in ad hoc flying, helped offset reduced scheduled service capacity. The company's strong relationships with charter customers and its operational reliability are crucial in this segment.

While the leisure space in the U.S. "needs to get smaller" for pricing power, potentially through industry consolidation, Sun Country's disciplined capacity management and focus on profitable routes position it favorably. Its TRASM performance has shown significant strength, with September 2025 up over 7% year-on-year in scheduled service, a trend expected to continue into Q4 2025 and Q1 2026. This suggests Sun Country is outperforming many peers in unit revenue, even amidst broader industry challenges.

Financial Performance and Strategic Trajectory

Sun Country has consistently demonstrated strong financial performance, reporting its 13th consecutive profitable quarter in Q3 2025. For the nine months ended September 30, 2025, total operating revenues increased 4% year-over-year to $845.8 million. This growth was primarily fueled by a robust 36% surge in cargo revenue to $107.0 million, driven by additional aircraft and contractual rate increases. Passenger revenue remained relatively flat year-over-year at $701.7 million, reflecting the strategic shift towards cargo. Profitability metrics show the impact of this transition. For the nine months ended September 30, 2025, operating income grew 3% to $82.4 million, with a 9.7% operating margin. Net income increased 13% to $44.7 million, resulting in diluted EPS of $0.81. Adjusted EBITDA for the period was $163.7 million, up 5% year-over-year. While Q3 2025 saw a temporary dip in operating income and net income due to the acute phase of cargo expansion and associated operational challenges, the underlying trends for the nine-month period remain positive.

The cargo segment's rapid expansion is a significant driver. Q3 2025 cargo revenue soared 51% year-over-year to $44.0 million, marking the highest quarterly cargo revenue in the company's history. This growth is expected to continue, with cargo revenue for September 2025 up 60% year-on-year, projected to exceed 75% by December.

Operating expenses reflect both growth and inflationary pressures. For the nine months ended September 30, 2025, salaries, wages, and benefits increased 14% due to an 11% rise in employee headcount and contractual rate increases for pilots and flight attendants. Maintenance expense rose 10% due to fleet growth and higher service rates. Aircraft fuel expense, however, decreased 13% due to an 11% drop in fuel cost per gallon and a 1% reduction in consumption. Adjusted CASM (Cost per Available Seat Mile) increased 6.3% for the nine months ended September 30, 2025, primarily due to lower scheduled service ASM production during the cargo transition.

Sun Country maintains a strong liquidity position, with total liquidity of $298.7 million as of September 30, 2025. This includes $111.8 million in cash and cash equivalents, $64.4 million in short-term investments, and available funds from its $75 million revolving credit facility and the remaining $54 million from its $108 million 2025 Term Loan Facility.

The company's net debt stood at $406.1 million, down from $438.2 million at the beginning of the year, demonstrating a commitment to balance sheet strengthening. Capital expenditures for 2025 are projected between $70 million and $80 million, primarily for spare engines and aircraft induction, with no significant aircraft acquisitions planned until late 2027.

Outlook and Guidance: A Clear Flight Path

Management's outlook for Sun Country is characterized by a strategic transition period followed by sustained, profitable growth. For Q4 2025, the company anticipates total revenue between $270 million and $280 million, with an operating margin of 5% to 8%. This quarter is expected to be "burdened by an acceleration of some heavy maintenance costs that we plan to pull forward from 2026." Scheduled service ASMs are projected to decline by 8% to 9% year-over-year in Q4 2025 as the cargo expansion fully annualizes.

Looking further ahead, Sun Country has set ambitious long-term financial targets, aiming to achieve approximately $1.5 billion in revenue, $300 million in EBITDA, and $2.50 in EPS by the second quarter of 2027. This growth will be driven by operating a fleet of 70 aircraft (20 cargo and 50 passenger), primarily by leveraging owned aircraft currently on lease that will redeliver through 2026. This strategy allows for significant growth without the need for new aircraft acquisitions, mitigating capital expenditure risks.

Scheduled service capacity is expected to show positive year-on-year growth by Q3 2026, recovering from the temporary reductions in 2025. The company anticipates strong unit revenue performance, with Q4 2025 TRASM projected to be up over 6%, and Q1 2026 advances expected to be "even stronger." This positive trend is supported by industry-wide capacity rationalization and robust demand in Sun Country's core leisure markets.

Unit costs are expected to stabilize. Management projects year-on-year CASM ex-fuel to reach a "0, flat level in the middle of next year, late next year and improve from there." This improvement is anticipated as post-COVID inflationary pressures subside and efficiency initiatives, such as the PBS implementation and a new pilot base in Cincinnati, take full effect. The company also expects to grow pilot credit hours by 10% annually, supporting both cargo and future passenger growth.

Risks and Challenges

Despite a compelling investment thesis, Sun Country faces several pertinent risks. The rapid expansion of the cargo business, while strategically beneficial, has created "operational challenges" and temporary unit cost pressures due to lower passenger fleet utilization and staffing surpluses. The "lumpiness of maintenance" , particularly heavy checks and engine repairs, can also impact short-term profitability.

Pilot upgrade constraints remain a limiting factor for long-range planning and the full realization of passenger fleet utilization targets. The tight market for used aircraft and engines could also pose challenges for opportunistic fleet additions beyond the currently owned and returning leased aircraft. Furthermore, the company, like all airlines, faces ongoing cost pressure from airports due to "massive capital programs." While its diversified model offers resilience, broader economic uncertainty and fuel price volatility could still impact financial performance.

Conclusion

Sun Country Airlines stands out in the airline industry with its resilient hybrid low-cost model, strategically balancing scheduled passenger, charter, and a rapidly expanding cargo business. The ongoing integration of eight additional Boeing 737-800 cargo aircraft for Amazon, while creating short-term operational and cost pressures, is a deliberate move to enhance long-term profitability and stability. This strategic pivot, coupled with strong unit revenue trends in its passenger segment and a disciplined approach to capacity management, positions Sun Country for sustained financial outperformance.

The company's commitment to leveraging its existing 737-NG fleet for future passenger growth, alongside technological enhancements like the PBS and a new co-branded credit card program, underpins its path to achieving ambitious revenue, EBITDA, and EPS targets by Q2 2027. With a robust balance sheet, significant liquidity, and a clear strategy for capital allocation, Sun Country is well-equipped to capitalize on market opportunities and navigate competitive dynamics. Its unique operational flexibility and focus on high-margin flying provide a compelling investment narrative, suggesting that Sun Country is not merely flying, but strategically ascending to new heights of profitability and market leadership.