Welcome to the Sun Country Airlines’ First Quarter 2021 Earnings Call. My name is Vanessa, and I will be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Thank you. And good morning, everyone. We issued our first-quarter earnings press release last night in the Investor Relations portion of our website at ir.suncountry.com. Our first-quarter 10-Q is also expected to be filed tonight after the close. On the call with me, I'm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President and Chief Financial Officer; and a host of others to help answer questions. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements, which are based upon management's current beliefs, expectations, and assumptions and are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and the cautionary statements outlined in our earnings release and our most recent SEC filings. We assume no obligation to update any forward-looking statements. With that said, I would now like to turn the call over to Jude.

Thanks, Chris. Good morning, everyone. Welcome to Sun Country's first quarterly earnings call as a public company following the successful completion of our initial public offering in March. It's great to have all our new shareholders on board. I'll start with some brief commentary about our operational performance and then provide some color about the demand environment. During the first quarter, we had a perfect controllable completion factor, in fact, we had over 250 consecutive days without a controllable cancellation. This was done while also delivering first quarter on time of 85% in industry-leading baggage performance. It's been a really tough year for our people, and I'm so proud to have been a part of this team that delivered these impressive results through such adversity. Thank you to all our employees. I'm also proud of our financial results for the first quarter as we delivered positive operating margin, even adjusting out special items, which includes the benefit of Cares grants. While we remain in an unpredictable demand environment, I'm encouraged by recent improvements that we're seeing in forward bookings. Demand really picked up around mid-February, and that momentum continues today. So first, for our scheduled service business, here are a few data points that give me confidence in a continued recovery. As of today, our summer schedule is sold to a higher load factor as compared to the same time in 2019. Also, we all know fares have been depressed throughout the pandemic. However, beginning in mid-March, our sole fares for summer travel have been in line with the same period in 2019, while ancillary unit revenues continue to trend well ahead. Our summer network is much more focused on VFR traffic return as our winter schedule, which tends to focus on vacationers. For the first time in the pandemic,…

Thanks, Jude. I'll review our financial first quarter results in more detail and provide an update on our balance sheet and liquidity position before we move into Q&A. For the three months ended March 31, 2021, total operating revenue was $127.6 million, a decrease of 52.7 million or 29% compared to Q1 of 2020 and 35% compared to Q1 of 2019. The decrease was driven largely by a 52% drop to $54.6 million in scheduled service revenue versus Q1 2020 resulting from the ongoing impact from the COVID-19 pandemic, particularly in January and February. The company saw improving demand during the quarter as the number of vaccinations in the country increased and normal seasonal leisure demand patterns began to return. Average fare in the first quarter of 2021 declined 30% to $98.77 versus $140.34 in the same period last year. Despite the decline in base fare, ancillary revenue per passenger was essentially flat, going from $43.04 in the first quarter of 2020 to $42.98 in the first quarter of 2021. Charter service revenue held up relatively well and decreased by only $3.4 million or 12% to $25.8 million versus Q1 of 2020. The return of some of our sports charters offset continued weakness among casino operators. Our first-quarter results were greatly strengthened by $21.6 million in revenue from our cargo services segment, which commenced in May of 2020 and therefore wasn't present in last year's first-quarter numbers. Our cargo service revenue comes from our air transportation services agreement with Amazon. Total operating expenses for the quarter decreased by 38% compared to the prior-year period. Operating expense includes a net specialized items credit of $26.9 million, consisting primarily of $32.2 million from the Cares Act payroll support program, offset by certain onetime items related to the purchase of five aircraft that…

Thank you. [Operator instructions] We have our first question from Hunter Keay with Wolfe Research. Please go ahead.

Good morning, everybody. Congratulations on the IPO.

Thanks, Hunter.

Of course. So how do we think about the long-term partnership with Amazon? I guess one way of asking this question, Jude, is if you were me, what would be the best way to model out revenue growth for the next three to five years?

Internally, for the next two to three years, we're looking at it as an annuity with a stable aircraft fleet of 12 aircraft that continue to produce reliable results with pass-through economics for fuel and heavy maintenance. So, it's basically an annuity in our business. You are kind of angling for some guidance on growth of that fleet, and we don't have any plans for that to happen in the near future. We continue to produce, I think, great results for them. And hopefully, that results in some growth opportunities for us in the future, but we don't have anything that we can commit to. I think one of the challenges in interpreting the results, which we've yet to demonstrate, is the synergies between that business and our SCAD business. Some countries always had a really seasonal business. And when we entered the contract before COVID had happened, the real value of that contract was to de-seasonalize our business so that we could be even more responsive to peak season demand in times like March and summer and the holidays. And I'm excited to be able to demonstrate those results as we move forward. So, as you look at it on a segment basis, I think, that understates the value of the cargo business as we look to grow out of the pandemic.

I got you. Thank you. And then to that point, Jude, on the seasonality, this has always been a very 1Q-heavy EBIT margin business for some country. You mentioned that in the prepared remarks too. But is there going to be a goal over the next few years to get a little more balance on a quarter-to-quarter basis? Or are you pretty much just in first quarter always? Yes, go ahead.

Yes, I mean, that's not really a stated goal. I think as we brought down our unit costs, more of summer should be good for us. I mean, we'll do a really nice business between Memorial Day and Labor Day. And that's just because of the cost structure of the business relative to 2018 and 2017 and earlier is just substantially different today. So, we'll be able to stimulate a lot of demand during that period. And then we've also found a lot of success in non-Minneapolis network opportunities, which tend to concentrate around the summer period. So, our Hawaii network is doing quite well. Our Mexican and Caribbean source market – destination markets out of source markets in the south in the summertime are doing really well. So, yes, I think the business will de-seasonalize, but there's nothing we can do to get people to travel in September or just be flying boxes.

Yes. And that's actually a good lead to my last question is how are you going to sell in O&Ds where you don't have a strong point-of-sale presence? You mentioned San Antonio, for example. Is there a way to compete there in any other way other than price and just gunning for spill traffic?

No, it's price. I think over time, we'll build a brand in the market like what we've done here. But people get on the airplane for price first. And that's why we're participants in the GDS distribution platforms and meta will be really important to us for people to find our airfares. And in many of these cases, we shouldn't understate the value of having a peak schedule. So, price is important, but averages are deceiving because we can have a higher average fare than most of the competitors in the market that would be low-cost carriers by competing with them on price but only during the peakiest times.

Okay, great. Okay, thanks, again.

Thanks, Hunter.

And we have our next question from Catherine O'Brien with Goldman Sachs. Please go ahead. Catherine O’Brien: Hey good morning, everyone, and congrats on the first call as a public company.

Thanks, Catherine [ph.]. Catherine O’Brien: Hey. So, you spoke to how attractive the used aircraft market is right now. We heard some pretty interesting numbers from one of your competitors just a couple of days ago. Should we be expecting to see you guys be pretty active acquiring aircraft this year? I know we're still in the throes of COVID, but things looking a little better. Do you guys have dry powder on your balance sheet? Or if not, would you consider raising capital too?

Yes, so this is Dave. I think the trends that you're hearing about in the used market for 737-800s are very similar to what we're seeing. And we have already signed up three incremental growth aircraft in the first quarter, and we're actively in the market for additional aircraft. I mean, we have a growth plan built out into the future, and it's likely that we may accelerate some of those aircraft acquisitions into this year just given sort of what we're seeing in the market. That's one of the advantages that we gained through the IPO was you can look at our balance sheet, we got a really healthy liquidity position, so we got the powder to grow. That's not to say that we're just going to simply use cash off the balance sheet to do that. I think financing is available to us at pretty attractive terms as well. So, we'll look at the most economic way to finance the aircraft, but we're very active in the used market. Catherine O’Brien: Great. And maybe just like a quick shorter-term question. Some of your ultra-low-cost peers we've heard from so far are planning on adding back more capacity in the second quarter. I think one just north and the other one is just south to flat versus 2019. Are you seeing something in the demand environment that is driving your relatively more conservative capacity plan, or is that some sort of structural constraint? Would love to hear some color. Thanks.

Well, we're getting higher payers than them for that reason. Look, I mean, the point is just that if you got a bunch of pilots sitting on their hands, then you probably want to add some flying because it's – you're chasing cash. All our pilots are fully employed right now because of our cargo business. So, our block hour production is well above what it was in pre-COVID levels. And we have the metal to grow into a recovery when it's worthwhile. But in order to add substantially back the same scheduled service volumes is what we had we're going to need to hire more crews. And so, it's just different dynamics here for the add-backs to happen. Catherine O’Brien: Got it. So maybe it would be fair to say, just since your pilots are already busy that allows you – and generating revenue on those Amazon flights allows you to perhaps be a little more focused on yield management versus load into the summer?

Absolutely. Yes, that's accurate. Catherine O’Brien: Great. Thank you so much for the time, everyone.

Sure.

And we have our next question from Mike Linenberg with Deutsche Bank. Please go ahead, sir.

Yes, hey, good morning.

Hey, Mike.

Hey, Mike.

Hey. Check on everybody else congrats. On the ancillary, that's held up well. In fact, you indicated that it was sort of trending better than previously. How much of that is that you just have a more robust ancillary product? Or is some of that just additional uptake in sort of what it was previously? Are there better uptake, more robust program? And when we think about the innings on ancillary, I know that you guys did have sort of a later start than a lot of other ULCCs, LCCs. Sort of what inning are we in on ancillary and sort of rolling out the various elements?

We're kind of in the seventh inning stretch right now. We really kicked off our ancillary growth with the migration over to the Navitaire platform, which happened in the summer 2019. And most of the momentum that we picked up immediately thereafter was in seat assignment and bag revenue, and that continues to grow, though at a much slower pace. Those product offerings will expand through machine learning and best practices with merchandising on the website. However, our recent growth is more focused on launching new products, like our insurance product and getting our third-party sales, which are car rentals and hotels back to what we have had in 2017, for example. And so – and those are really value-add initiatives because they have very little impact on the airfare. If I rated bag fees, there's going to be a negative impact on fair. So, I'm just really bullish on ancillary. And there's – we have some headroom left to go. It's, I don't know, $4, $5 that we're going to get over the next, I don't know, year or two. But it's going to be largely focused on non-bag and seat unit revenue expansions.

Great. Great. And then just a question to Dave. We've seen some of the more profit carriers that have had good profitability in the past under the Cares Act to be able to utilize the benefit of NOLs and go back four, five years. Now I know that there was a tax-sharing agreement here with your primary shareholder. Do you get – should we anticipate that you do get some cash tax refunds in subsequent quarters from here? Is that out there as we think about liquidity? Can you just shed some light on that, if there's anything? Thanks.

Yes. As I think it's pretty typical with a private equity ownership like us, we have a tax receivable agreement with our owner. I think you pointed it out, given restrictions in the Cares Act, we really don't pay out anything under the TRA, while the Cares Act restrictions are in place, those go through March of 23 right now.

Okay.

Yes. Yes. So essentially, during that period, we're going to get the benefit of our NOLs. Post that period, you should think of us, for the most part, as a kind of a full cash taxpayer as the benefit of the NOL will accrue to the owners.

Okay. Fair enough. Thanks, Dave. Thanks, everyone.

Thanks, Mike.

We have our next question from Brandon Oglenski with Barclays.

Hey. Good morning, and congrats, guys, on your first quarter as a public company.

Thanks, Brandon.

Jude, I wonder if you could just give us some clarification here. You did say the summer schedule is sold to a higher load factor, but I'm assuming you're relating that to the same period in time in the booking curve in 2019. And I think you also said fares are also coming in higher, but is that also in relation to the same time in the booking curve?

Yes. So, for clarity, as we – if we were to compare today versus the same period in 2019 and looking at summer bookings, which for us are between Memorial Day and Labor Day, our load factors for that period now are about a little bit higher than what they were in 2019, but there's less capacity. Fares for the last roughly 45 days have been selling at the same level as they were selling in the same period of 2019, but we've been selling the summer schedule for much longer than that and the fares that we sold in advance of that period were lower. So, we've seen a recovery in fares. We've seen a willingness of consumers to pay what we're paying in pre-COVID environment, but it just started about 45 days ago for the summer travel period. And then the color there also is that, sorry, is that we're selling at a much higher ancillary level today as well, which is good.

Okay. This question is coming from a novice, but I would assume that in this type of environment where you're getting up in the booking curve, you're actually able now to revenue manage and maybe that wasn't even possible 45 days ago?

Yes. I mean, it's just such a dynamic environment. We don't expect the kind of close in fair premiums that we had achieved like going into March period. So, we expect a much flatter booking curve, if I had to guess, but it really depends on kind of what OA capacity does across the industry for the summer months. Thus far, carriers have been pretty controlled and restrained. Summer looks really good, but it's just been a really dynamic environment for the last year. So, I can't make any predictions about what close in fair are going to look like.

Okay. Appreciate that. And, Dave, this is kind of a specific question, but are you guys going to be providing any block hour disclosure on the cargo business?

Yes. So, the Q will come out this afternoon, and there will be more of a breakdown about block hours by segment in that document.

Okay. Great. So, I guess, more importantly then, do you view the Amazon contract as fully up and running now, so at the profitability levels you want to see? Or I guess, what could potentially drive profitability of that business higher?

Yes. I think you should probably think about it as fully up and running in the first quarter. We really got fully up and running at the end of last year. There is an opportunity for some profit growth going forward. Obviously, if we grow the fleet at some point, there's an opportunity there, but there's also some escalators built in later years. But I think for the time being, you should think about first quarter is kind of our number.

Okay. Appreciate it. Thanks, guys.

I just want to clarify one other thing from the last comment, Mike. So, the Cares Act grants, the restrictions on exec comp go through March of 2023. The restrictions on dividends only go through September of 2022.

And thank you. I see that we have a follow-up question from Hunter Keay with Wolfe Research. Please go ahead, sir.

Thanks, again. So just, I guess, a couple more sort of just like philosophical questions for you guys here. When you contemplate buying a used plane, using cash versus debt or finance lease, whatever it might be, what are the things that you factor in other than just obviously, just the pure economics? Is there anything philosophically attached? Is there a bias toward using cash and you have to be convinced of some other vehicle to use that over using cash? What's the default way to think about buying planes?

I guess up until the IPO, the default way was thinking about how can we finance the aircraft. So, we're in a bit of a new world. Look, I mean, for us, it's legitimately just sort of straight up what the economics are. We're obviously going to be a little bit more biased toward cash than we have been in the past, so if really attractive financing is available. Previously, we were looking at really high LTV financings that had an impact on the rate that we paid. Now we don't need to do that anymore, and we can look at lower LTVs with better pricing. So that world is a little bit more open to us now. But I think you'll see us move forward with some combination of cash and financing. It's just we're seeing attractive financing out there. And as long as that's available, we're probably going to tap it. Right now, we're seeing, honestly, the structure being dictated more by the seller managing their book values than by whatever we prefer, which we're happy to do.

Yes. I was wondering if there's sort of like a – is there an aversion to debt, is the corporate philosophy, but let's try to just keep our debt down and let's view buying a plane with cash is sort of having a de facto revolver available because it's an unencumbered asset that we would buy? Or is it more just like, hey, we're not afraid to lever up here, which folds into the next sort of philosophic question I have for you, Dave, is how do you think about the balance sheet philosophically? Is there a minimum cash balance you feel comfortable with? What are your general views on debt? Just tell us how you're going to think about managing the balance sheet over the next few years.

Yes. I think our general philosophy overall is to keep our leverage ratio relatively low, particularly compared to our peers. We don't have an appetite for really leveraging up the balance sheet. I think we're probably pretty conservative in that respect. We've run the business with pretty low levels of cash before, and I'm confident in our ability to do that. We have ample cash on the balance sheet at this point. And as I said, we're going to use some of it to grow. But we don't have plans to significantly lever up the balance sheet here. I mean, that's driven, in my mind, by a pursuit for the absolute flexibility, which is the core of our fundamental core is to be able to be absolutely flexible with our capacity and debt is a fixed cut.

Yes. Okay and, Jude, is there – from your time with Allegiant, I think there were a couple of times where Allegiant got – I'm not saying this was your decision, but a little over its skis in terms of growth. Is there a maximum number of airplanes or capacity growth that you feel comfortable pursuing in a year?

Well, last year was pretty big for us. I mean, we took on 15 airplanes. Grant is sitting here next to me so we had a little bit of my answer. I think we can do about one a month pretty sustainably.

Okay

But I think the important message there is that we're going to find airplanes at values where we can generate the returns, we think we should get. And if we don't get those airplanes, we're not going to buy them and not going to grow at the same rate. And if we do, we'll grow it more rapidly. So, the market prices of aircraft will be an input into our growth profile.

Yes. I mean, I think we have a pretty well-structured growth plan over the next three years here, which is driven by a network plan and the knowledge of where we want to grow this business. So, it's not – we're not just adding aircraft just for the sake of growth. As Jude pointed out, we need the kind of returns that we need in order to add aircraft. When I was talking about growing more quickly before it's sort of pulling some of that forward, just given the pretty unprecedented market for used aircraft right now.

Yes. I mean, one of the problems the industry has is like an airplane isn't always the same amount of production. If we get the right value, we can do the same amount of flying with more aircraft generating higher unit revenues because of our peak strategy.

Can I ask another question? Are there more people in queue?

I'll lean into it. I think we…

All right. No. That's cool. Just – I'm not trying to fill time. Normally, this is a good use of time. But the – help us understand charter a little bit. It's kind of a – it's an industry that – I understand what charter is, but I don't really know a lot about how it works in terms of how you sell the business and what the barriers to entry are? Why – we saw United take some airplanes instead of flying nonhub point to point, Columbus to Myrtle. What's preventing one of these network airlines on taking five airplanes and just throwing them into the charter business? If their SCAD stuff doesn't recover as well as they wanted to. I mean, what are the – what makes you guys have a competitive advantage in that market? And how does it generally work? What can you tell us about charter that we might not know about in terms of maybe how relationships drive business and things like that?

Let me introduce Grant, who runs our charter business.

Hey, Hunter. This is Grant, and I have some background in that space. So, one of the things they absolutely could to both the airplanes. But what's really unique about the charter department is you need to have really close relationships, both internally and externally. Your customers sort of come to you late. They can change on the fly, and our organization handles that well. I think we do this well as anyone in the industry. But big airlines, those close in changes, and it can sometimes throw the operating side of the airline into a little bit of flux. So, we do that really, really well. And you also mentioned relationships. Relationships with customers are – they're just key in this business. And this airline has a long track record, and we've doubled down on that. We're doing a lot of work to just make sure we have great existing relationships and then taking our brand on the road and introducing ourselves to new customers. So, I think there's a lot of opportunity in this space.

I mean, pure charter airlines haven't historically done very well financially because of the volatility in the charter space. And then pure SCAD carriers that are of scale are challenged with charters because of the required flexibility from the customers. So, we're kind of uniquely positioned with both the flexibility and also the financial wherewithal to handle the variations in the business. And I think that comes back to our overall business model and the flexibility we talk about between these three segments. The unpredictability leads to the fact that we need to maintain lower cost at somewhat lower utilization to be able to sit an airplane when we need to. So, we're buying in the used market. We've tried to build sort of a holistic business model.

Yes. Okay. Well, thanks for all the time, everybody. Appreciate it.

Sure, Hunter.

Thank you. We now have a follow-up from Brandon Oglenski with Barclays.

Hey, guys. I figured we could ask one too. But I did want to touch on growing outside of Minneapolis. And, Jude, does that create any difficulties going forward because I think MSP is you're only base. Right?

That's right. Yes. I mean, operationally, we look at it as a strength. I think as we mature as an airline, say, four to five years from now, we might need to revisit this. But the flexibility of being able to fly a Hawaiian network and only doing it between Memorial Day and Labor Day without having to move crews around on a permanent basis is really valuable. Our Dallas network to the Mexican Caribbean markets is substantial, but it's really concentrated, again, Memorial Day to Labor Day. And we are effectively able to do it here out of Minneapolis. There's a little bit more cost because we position crews, but then we don't have to burden the operation in those markets with the shutdown in September. So, I view it, again, the next three to four years, we may need to revisit this. But right now, it's working really well that we can be really efficient in seasonal markets. We also have the advantage of having a winter peak so that we're deploying capital. We're deploying assets when it's in most demand in other markets. So, this is really powerful right now. Those growth opportunities are just working really well.

But I would assume your Minneapolis opportunities probably have a little bit lower hurdle given your brand power in the market. Is that challenging outside of Minne?

In the Upper Midwest, our brand is pretty strong. I mean, I think we've seen ads in Madison and other places that have been – that have worked really well for us. So, I think there's definitely a strong – the strongest brand affinity is here in the twin cities. But if you get into the Upper Midwest in general, I think the brand is still recognized.

Yes. And this is Grant, Brandon. One of the other benefits is Minneapolis is a big market. So, you actually can do non-Minne by being connected to the Minne franchise as well. Think of Houston this summer. We turn on Houston-Cancun, which, as Jude mentioned before, we're going after the peak days of the peak season, and that's going to be a really successful plan for us. But we've also tied in Minneapolis to Houston, which is a viable market as well. So, we sort of get the benefits on both sides.

Okay. Thanks for the follow-up.

Sure.

And now we have a follow-up question from Catherine O'Brien with Goldman Sachs. Please go ahead. Catherine O’Brien: Hey, guys. This is great. We always have more questions. So, one for me. As – a longer-term one, as we think about the balance sheet from here, obviously, Dave, I know you just mentioned there's no dividends allowed until 2022. We've seen growth airlines take different tax with capital returns. Should we think about kind of for the medium-term for you guys even beyond that 2022 official restriction at the best use of capital is going to be growth? Or would you guys consider share buyback, special dividend? How are you guys thinking about that?

Here is honestly how we're thinking about it. Share buybacks aren't in my radar screen right now. I mean, we're focused on growing the airline, and we're restricted anyway for, what, another year and a half or so. So, we're going to manage the balance sheet prudently. But at this point, we think we got opportunity in front of us. The business model is working. So that's our focus. Catherine O’Brien: Got it. And then maybe one on cost, sprung to mind when we talked about pilots already being fully employed. Across the industry, you're seeing a lot of other carriers who have costs stepping up in the first half of this year around getting pilots that were furloughed or on leave, retrained at the summer peak, putting aircraft back into the shop that's been in storage. How do we think all that for you guys? I know, obviously, you were able to fly a bit more than the industry throughout just given cargo and some of the charter opportunities. Should we see any pressure on those items? Or have you really been fully – like that already happened a couple of quarters ago? Thanks.

Yes. I mean, one of the things to think about for Sun Country is we were actually bigger in the fourth quarter of 2020 than we were at the beginning of 2020 because of the Amazon business. So, we didn't go through furloughs. I mean, I've been at network carriers before with multiple fleet types and you get into furloughs and shrinking and you're training down the system, and it's turning a battleship to regrow it. We don't have any of that. First of all, our fleets obviously one fleet type. And then we didn't get any smaller. So, we didn't furlough people. Going forward, the challenge is just going to be to continue to hire pilots and grow at the rate that we want to grow.

Yes. And also, Junior Ridge is really valuable. So, we're continuing to hire a new staff and that keeps unit rates relatively moderate, which is going to be a standout in the industry as other carriers have done the opposite. Catherine O’Brien: Got it. Thanks for the extra time.

Yes.

And thank you. We have no further questions. I will now turn the call over to Jude Bricker for closing remarks.

Well, thanks for your participation in our first-ever earnings call. We're excited to have our new investors, and we're excited about the future, and talk to you guys again in 90 days. Thank you.

Thanks.

And thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may disconnect.