Welcome to the Sun Country Airlines’ Second Quarter 2021 Earnings Call. My name is Brian, and I'll be your operator for today's call. [Operator instructions] After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's call is being recorded. [Operator instructions] I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President and Chief Financial Officer, and group 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 cautionary statements outlined in our earnings release and most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our second-quarter earnings press release as well as our 10-Q on the investor relations portion of our website at ir.suncountry.com. With that, I would like to now turn the call over to Jude.

Thanks, Chris. Good morning, everybody. Welcome to Sun Country's second-quarter earnings call. Our multi-segment business model is unique in the airline industry. Due to the predictability of our cargo and charter businesses, we are able to deliver the most flexible scheduled service capacity in the industry. The combination of our scheduled flexibility and low fixed cost model allows to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to our structural advantages, we will be able to reliably deliver strong profitability throughout all cycles. And as demonstrated in the second quarter, and we're clearly pleased with our results. We are experiencing a rapid recovery in demand of our scheduled service. In June in 2021, our scheduled service TRASM exceeded our comp for June in 2019 and advanced bookings throughout our selling schedule continue to pace ahead of their pre-pandemic comps. Unsurprisingly, demand is particularly strong and domestic leisure, which represents most of our network. Additionally, we're seeing fall charter demand in near pre-pandemic levels, with a return of fall NCAA football. And of course, our cargo business continues to perform well. Currently, we're focused on two corporate priorities. First is delivering quality operational results while building the airline-backed pre-pandemic utilization levels. This is a big lift for us as July 2021, departures will already exceed our July 2019 departures by nearly 16%. Currently, we're hiring across all major labor groups to meet our operational growth needs. Thus far, we've been successful, delivering over 99.9% controllable completion factor, meeting our goals for on time and baggage metrics. I'm so proud of the talent and hard work demonstrated every day by our frontline employees and our operational leadership. Second is making some strategic investments afforded to us by our balance sheet strength and historically cheap asset prices across commercial aviation. Mostly, that means fleet growth and at appropriate prices, we're willing to spend on future fleet needs, even if that means running a small short-term surplus. Thus far, we've committed to three growth aircraft that we previously reported, but we're in late-stage negotiations on several larger aircraft deals. Aside from fleet opportunities, we found compelling investment and engines with a commitment on five engines and infrastructure as we recently closed on the purchase of our own flight simulator. And with that, I'll turn it over to Dave, who will discuss our financial results and outlook in greater detail.

Thanks, Jude. I'll now review our second-quarter financial results in more detail and provide an update on our balance sheet and liquidity position before moving into Q&A. For the three months ended June 30, 2021, total operating revenue was $149.2 million, a decrease of 12% versus the second quarter of 2019 and a dramatic improvement versus the trough of the pandemic in the second quarter of last year. This 12% decline compares to a 35% decline in Q1 2021 revenue versus Q1 2019 revenue, demonstrating the strong, steady sequential improvement that we're seeing. Q2 revenue was also significantly higher than our total revenue expectations that we described in early May. This increase was predominantly in unit revenue as our capacity was largely in line with our expectations. For the quarter, our total revenue per ASM or TRASM, which excludes cargo revenue, while including our charter revenue, was down 9% versus Q2 of 2019, while our total ASMs declined 19% versus the same period. Our ancillary revenue per passenger continues to be strong at $41.66 or 26% higher than Q2 of 2019, and our average fare was $95.81 or 11.2% lower than Q2 of 2019. While this is still down versus 2019, it demonstrates strong continued improvement even in our seasonally weaker second quarter. For example, scheduled revenue per passenger declined 22% sequentially between the second quarter and the first quarter of 2019, while it only declined 3% this year in spite of 3.5% sequential growth in scheduled ASMs. Typically, we would fly fewer ASMs in Q2 than in Q1. TRASM for June was down only 4.9% versus June of 2019. Charter service revenue was $29 million for the quarter, which was approximately 31% lower than the second quarter of 2019. Charter block hours in the quarter were down 24% versus…

Thank you. [Operator instructions] First question, we have Catherine O'Brien from Goldman Sachs.

Hey, everyone. Thank you so much for the time.

Hi, Catherine.

Hi, Catherine.

Hey, guys. So, revenue came in quite a bit better in your forecasting at the beginning of the quarter. We've heard from other carriers that demand picked up through the quarter. But can you just give us some color on what trended better for Sun Country? Is that fares, loads? Were there some standout regions? Thanks.

Sure. So, Grant Whitney is here, so I'll turn it over to him in just a second, but let me give you my comments. Beginning around mid-February was where we saw really a dramatic move in demand to the better. And that continued all the way through June. As I mentioned in my prepared comments, we exceeded June 2019 TRASM, which is higher fares than a slightly lower load factor. And the demand environment improved throughout the quarter on a flown basis relative to pre-pandemic comps. Across the network, we're seeing strength. Some of that can be explained through restarts of OA capacity in certain markets. But generally, the leisure markets continue to do well. And we're seeing big city connectivity to Minneapolis perform really well. The only exceptions to a broadly strong picture, we believe, can be explained through a delay in the infrastructure build-out in some of the destination markets that we serve that are relatively small. That means that travelers aren't able to get a hotel room or a rental car or go out to dinner. And so generally, things look really good, and that is continuing in the trends that we're seeing for bookings going forward through October, which is the time period that we have a meaningful booking profile. Grant?

Yes. Jude, that's a great answer. Catherine, the only thing I'd add to that is, I think, as we saw through the quarter, we – the Southeast, particularly Florida, was really strong in April. And then as Jude mentioned, sort of the coasts and the Mexican resort destinations really turned on in June, and it just speaks to the value of our business model and then we can move the capacity that quickly. So we were able to take advantage of it and as things slowed down, we got out of them and moved into better things.

That's great. Thanks for the color. And then I guess, following on some comments you made last quarter. It sounds like you've been busy sourcing attractive aircraft in the secondary market. Can you just help us think through what the upper bounds of your acquisition targets might be just in terms of what you could smoothly add over the next 12 months from an operational and hiring standpoint? And I guess, I think you might have mentioned something about this in the prepared remarks, but would you consider buying aircraft today, just given the current market backdrop and then waiting to induct them when the operation could support them? Thank you so much.

Yes. So this is Dave. I mean, first of all, we've – there's a lot of aircraft on the market, and we have gone through a lot of different – through bidding processes on a lot of aircraft to yield the aircraft that we have brought on, which is three more so far this year, and we have a strong bead on many others, including some interesting multi-aircraft deals. We've said many times, I think that our passenger fleet plan target is 50 aircraft sometime late in 2023. I think operationally, probably the max pedal to the metal for us would be an aircraft a month. I don't know if we could sustain that for two years, but it's an aircraft a month kind of thing at max. So I think operationally, we can bring in the aircraft that we need to bring in to meet our fleet plan. The answer to your second question is potentially, yes. In other words, if there were some really attractive deals out there, particularly multi-aircraft opportunities or really economic aircraft opportunities. We probably wouldn't bring those in, even if we didn't have an immediate need for them. One of the things we can always do though, given the strength of our model, we can bring an aircraft that we might not necessarily have a scheduled service need for in a particular month or quarter, even that we bring it in, but we can throw it into our ad hoc charter pool. And as long as we get the pilots to resource it, we can use the aircraft to pick up some incremental charter revenue. We talked about keeping our ownership costs low, which we do. So that helps us be able to sort of utilize these aircraft less than we otherwise would at periods where we don't have scheduled service opportunities for them.

One other quick point on asset value is that most of the value of the planes that we're transacting on are encompassed in the engines, and that's an appreciating asset along with OEM escalation. So there's not a lot of cost with the stockpiling.

Great. Thank you so much.

The next question, we have Hunter Keay with Wolfe Research.

Good morning.

Hey, Hunter.

Hey. So on Amazon, if they were to theoretically come to you and say, please take 10 more airplanes. Would you feel the need to go out and find 10 more passenger aircraft just to ensure that you stay balanced and maybe not immediately, but would you feel a need to sort of accelerate passenger aircraft acquisition to stay balanced? Or would you just kind of let yourself get a little over-indexed to Amazon?

We would probably let ourselves get over-indexed temporarily. I mean, the optimal ratio is in between the 20% to 30% range, and that's based on minimum guarantees to our crews so that we can build an optimal scheduled service seasonal airline. So I mean, if there's an opportunity to expand with Amazon, we would probably take it on and wait and see what happens. Our current plan is that there isn't anything in the horizon, and we're going to focus on building out our scheduled service to pre-pandemic level utilization levels of the fleet that we have. And so I think it's good flying and if it's an opportunity, it presents itself, we'll evaluate it, but optimal is 75-25 for us, roughly.

Okay. Thanks, Jude. And then the – your loyalty program, what is your penetration of the Twin Cities area relative to your local origin market share?

Yes. So let me define loyalty. First is just active customers that we interact with through digital marketing. There's about 1 million. So there's 4.5 million people, 90 minutes from the Twin Cities airport. We have 1 million households that we deal with, which is pretty high penetration. I'm not going to give you numbers on our credit card program, which we would consider like the active loyalty members, other than that it's growing really rapidly. Keep in mind, we inherited when we got a loyalty program that we trashed and rewrote. So the loyalty program at Sun Country is effectively three years old. And so we're still kind of making some adjustments and tweaks and working to grow that program out.

And one of those years was a COVID year.

Exactly, yes.

Okay.

So I think the encouraging thing about our credit card program is that it's growing and that now that we're through COVID, we're seeing sign-ups back to the pace that we had had in 2019, and spend is back. And we can talk more about it as we get a full year out of COVID and kind of see what the steady state of that product looks like.

Okay. Thanks, guys.

We've also – sorry, Hunter, I'd only add that during COVID, we've made sort of a strategic focus on making sure we're building out the Minneapolis network. So our market share in Minneapolis, we're really happy with how that's developed over the last 12 months.

Right. Okay. Thank you.

Thank you. And next question, we have the line of Mike Linenberg with Deutsche Bank.

Good morning, everyone. Two questions here. Hey Dave, as you think about your liquidity, which is actually quite high relative to your revenue base? I realize we're still sort of in the midst of a pandemic here. But as you think longer term, have you sort of thought about what is the appropriate level? And the fact that unlike most other carriers, you've got about third of your revenue that is under sort of long-term contract or longer in nature. And so you may not need to carry as much cash as your competitors. Where are you coming out on that?

That's a good question. I mean, here's the dilemma with that. Given the way the model works, the fact that a big chunk of our business is under long-term contract or let's say heavily repeatable at least, we can probably operate and we've demonstrated the ability to operate with a whole lot less capital than we have on the balance sheet right now. So there's no question about that. We have surplus cash on the balance sheet today. What the optimal number is something probably lower than that. Now the one caveat that I would sort of put in here is we talked about a pretty aggressive growth plan. And that means hiring, it means buying aircraft, it means going to airports, it means ground equipment, it means everything sort of training infrastructure, everything associated with that and we said at the time of the IPO that, that's what we were going to use our capital for. And that is what we're going to use our capital for. I hesitate to throw out a precise number of the optimal amount of capital. If you're looking at a number of 20% to 30% of our total revenue that seems from my history in the industry like a rough number and we got more than that now.

Great. Okay, that's helpful. And then just a second question. You look through your list here of 11 new airports. And I'm curious, I'm going to focus in on Punta Gorda and Asheville. I'm curious about how much work you had done in advance before announcing those – or was that more of a reaction to a competitor flying for many to those markets? And look, I – many at your home, it's your bread and butter. And I suspect that at the end of the day, you're going to do everything you can to defend that market. So just curious on kind of market selection and kind of the response there. Were those markets that you had been planning for some time? Or was that more of a reactionary move? Whatever you can – any color on that would be great. Thanks.

West Palm is a reentry. And in West Florida, along the coast, we want to be there for Minnesotans to go to every single destination across the West Coast. I think it kind of answers your question, Mike. I mean it's our home market. We aim to be the choice carrier for everybody in the Twin Cities that pays with their own money as distinct from Delta's customers, and we're going to defend this market aggressively.

Okay. Fair enough. Thanks

Thank you. [Operator Instructions] Next question we have Chris Stathoulopoulos with Susquehanna Inter.

Hey. Good morning, everyone, and thanks for taking my question. So in your prepared remarks, you mentioned about the resiliency of your margins through the cycle, given your unique operating model in that business. So I realize that your business is a lot different today than it was a few years ago. But could you help us frame what margins might look like through a few cycle with the current business line that you currently have? Thanks.

I don't think we want to get into a lot of forward-looking multiyear margin guidance. I think the point was is that sort of given the stability of our cargo business, given the high degree of repeatability of our charter business, we can work through cycles on the passenger scheduled service side and still maintain above-average levels of profitability for the industry. I hesitate to give out exactly what those long-term margins would be. But I think we're very confident that they would be in excess of the margins that could be generated by carriers who rely almost exclusively on the scheduled passenger business.

Okay. Thank you. And as a follow-up, just curious on your utilization levels with Amazon as more people return to office and perhaps there's less online orders for home. Curious if you're seeing any change in volumes in utilization there? Thank you.

No. It's very consistent. And our expectation is that continues into the future. What you saw in the second quarter should – is steady state in the future.

Thanks for the time.

And there are no further questions, presenters?

All right. Thanks, everyone. Thanks for your interest in Sun Country. Have a good day, everybody.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.