Welcome to the Sun Country Airlines Third Quarter 2021 Earnings Call. My name is Amitras, and I will be your operator for today's call. . 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 a talented 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, assumptions 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 our most SEC filings. We assume no obligation to update any forward-looking statements. You can find our third quarter earnings press release on the Investor Relations portion of our website at ir.suncountry.com. With that said, I would like to turn the call over now to Jude.

Thanks, Chris. Good morning, everyone. To review, our multisegment business model is unique in the airline industry. Due to the predictability of our charter and cargo 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 allow us 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 the industry's best profitability throughout all cycles. Traditionally, the third quarter is a relatively weak quarter for us. However, I'm happy to report industry-leading EBITDA and operating margins of 21.3% and 13.2%, respectively. While the Delta variant negatively impact our scheduled service revenue, our cargo and charter segments outperformed to the upside. In addition, our variable capacity model helped to minimize our exposure to the demand weakness in late August, early September as we flew 41% of the quarter's scheduled service departures in July and just 22 in September. This focus on flying more during peak demand helped to produce a 4% TRASM-ings versus the third quarter 2019. In fact, TRASM improved in every month within the quarter in spite of the Delta variant. We attribute this trend to careful allocation of our capacity and continued improving performance of our ancillary products. Fourth quarter bookings are trending positively as well. Similar to the third quarter, we've loaded a schedule focused primarily on peak periods. For example, currently, in the fourth quarter, 85% of our ASMs are on peak days, up from 80% in the fourth quarter of 2019. I want to address 2 common themes across our industry. First, operational performance. It seems operations are straining everywhere across the economy as we recover from the COVID crisis. So I'm especially…

Thanks, Jude. I'll now review our third quarter financial results in more detail and provide an update on our fleet acquisitions before moving into Q&A. We produced $173.7 million of revenue in the third quarter. This is the highest level since Q1 of '20 and is higher than the third quarter of 2019. For the scheduled service passenger business, PRASM was $0.0619, which is only 1% below Q3 '19 levels. Viewed sequentially, PRASM increased 11% versus the second quarter of '21 and an 8% increase in scheduled service ASMs. Ancillary revenue continues to stay strong at $42.91 per passenger, which is 33% higher than the third quarter of '19. We're still trailing our 2019 load factor but are encouraged by the strengthening that we are seeing in pricing. Total revenue per ASM, or TRASM, which includes revenue from our charter business but excludes our cargo segment, was $0.0963, up from $0.0926 in Q3 of '19. Charter revenue was $33.8 million for the quarter. Although still not fully back to Q3 '19 levels, charter revenue is rebounding nicely, and we are seeing strong growth in our sports business, particularly our flying for Major League Soccer. As Jude noted, we recently signed a 5-year deal to be the charter service provider to the MLS. Our track charter programs, which consists largely of casino flying, are still recovering from the pandemic, and there remains excess capacity from other airlines and the military charter market, which we think will subside once more lucrative international and business traffic begins to return. Cargo revenue in the third quarter was $24.4 million and benefited from a 4% increase in block hours versus the second quarter of '21. Turning now to operating costs. We continue to maintain solid cost discipline with total operating expenses 6% lower than they…

. The first question comes from the line of Hunter Keay with Wolfe Research.

It's actually Noah Chase on for Hunter Keay. I noticed you used the word sensibly when describing your capacity growth. What do you mean by that in the context of your expansion plans?

The main thing we would mean is making sure that we're able to deliver quality operational results. So we have the fleet to grow substantially faster than we're growing. But recall, we didn't have the kind of drawdown most of the airline industry had, so we kept everybody working through the COVID pandemic. Now we're running about 15% to 20% higher depending on the period. But as we look into the next year, then 2019 levels, which is substantial, considering that we stopped hiring like most airlines through the pandemic. So we're in a full ramp-up mode right now. We're having across all major labor categories, and that's about as fast as we can go.

Your next question comes from the line of Catherine O'Brien with Goldman Sachs.

So I think you guys were the only U.S. airline to beat your initial guidance this quarter given the impact of the Delta variant mid-quarter. I guess what went better to offset that delta really weakness? I know you had mentioned in the press release, you did see some across your system.

Yes. I think -- this is Dave. I think there were probably a few things. When we went into our initial guidance, I think the demand environment has continued to be pretty unclear. So we were maybe a tad conservative just not knowing what to expect with the ups and downs due to COVID. We benefited from a little bit more cargo flying during the quarter than we had originally anticipated. And then I think everybody at the company is just doing a great job at cost control and keeping our operating costs in line. I think all those things sort of manifested themselves during the period to produce the operating margins that we saw. So I don't think there was anything really extraordinary, just sort of continued tight management of the business.

Okay. Got it. And then maybe just one on the forward book. Your implied CASM ex fuel, based on your guidance, would be down sequentially from third quarter despite ASMs actually being lower in the fourth quarter. Were there some timing events in the third quarter that drove a little bit of inflation? Or is the operation just really gaining efficiency going forward? What's driving that?

I don't know that our CASM is going to be lower in the fourth quarter than it is in the third quarter just because we're smaller. So I don't think -- I don't necessarily think that's the case. There wasn't any sort of particular -- I'm thinking there wasn't any particularly costly onetime item in the third quarter at all. In the fourth quarter, actually, we're seeing a bit of a step-up in some maintenance events with just that the impact of that is pretty small. So really, any drivers of CASM change from 3 to 4 is mainly just due to capacity.

Yes. My comments, Catherine, were mainly around fourth quarter as compared to '19, which we would expect to be roughly flat. And there's some variability in there, so give or take a little bit.

Got it. I'll sharpen the pencil on the midpoint for the model. If I could just maybe sneak in 1 last quick one. I've been hearing that the secondary aircraft market is starting to heat up a little bit and that used aircraft values are starting to improve. I guess, first, you've seen the same thing and probably it would be helpful if you could help us frame where used aircraft are versus pre-COVID when you're probably initially making the growth plans over the next couple of years?

We've sort of tallied it up the other day. We've looked at 150 aircraft so far this year. I told you we've acquired 5, so we're pretty picky. But there's plenty of aircraft out there from our standpoint to acquire. I don't think we've seen any real tightening in pricing. If we have, it's maybe been pretty minor. But we continue to find aircraft probably at similar pricing to what we saw in -- earlier in the year. So I haven't noticed any big change other than maybe a little bit on the margins, but nothing significant. The last two airplanes we did were done very recently, and they are in line with the same economics as the other airplanes we acquired this year. And what I'd say is the used market is driven by weakness throughout the world. So where we saw now North America and Europe tightening a little bit, Southeast Asia is really weak right now. And so we see a lot of capacity still coming to market from those jurisdictions. I'm not too concerned about finding the lift we need. Relative to pre-pandemic, what do you think, Jude? Down 30% -- 25%, 30% in pricing?

Yes. about right.

Yes, we're buying mostly part-out values, even newer equipment.

Your next question comes from the line of Michael Linenberg with Deutsche Bank.

Look, as a federal contractor and having to deal with this vaccine mandate, where are you guys on that? How does your personnel situation look?

Do you want to take that one?

Yes, this is Greg. So as you said, the vaccine mandate is something that applies to us. We -- we've rolled that out. Our team has done a great job of getting the technology up so that people can upload their status. We're continuing to encourage all of our employees, and we're pretty optimistic with regard to where we are right now. I think for the entire industry is sort of trying to figure out how to manage through this and I think we've got a good plan. The deadline is the 8th of December by Federal mandate. I think probably we'll use that month to try to chase down folks that haven't submitted their vaccination cards. I wouldn't expect any operational impact from the vaccine mandate this quarter. The reaction from the employees was mixed, as you would imagine. We're kind of dealing with some frustration, but we'll be compliant.

Very good. With respect to the pass-through economics of charter and cargo, Jude, as you mentioned, as you think about with fuel prices up a lot, I think Dave said they were up like $0.31 or maybe it was 31%, maybe it is $0.31 per gallon, 4Q over 3Q. How quickly can you sort of repivot your capacity towards charter and cargo? And I guess you did say that 85% of your capacity in the fourth quarter is going to be peak days versus 80% in '19. So it seems like in the scheduled business, you're really focused on the busiest days, maybe because of higher fuel prices. Just thoughts on that.

We can be pretty responsive when you think about ad hoc opportunities in the charter market. We can very close in and reallocate. But it doesn't have the kind of volume to really move substantial units of capacity out of sched service. So sched's planned at least 90 days in advance. And our Amazon flying is mostly flat. So the way we think about it is we want to have a cost structure and these other segments provide the kind of economics where we can fly a little or a lot in sched business and deliver the same unit costs. And that's kind of where we're headed. I wouldn't think of it, though, as a reallocation in response to fuel prices. And one other bit of commentary, Mike, is like what we're seeing on the yield side is really positive right now. I'm not sure even in this fuel price, we want to move that much capacity out of the sched, particularly for the holiday season. I mean if you're out there buying tickets, it's going to be pretty expensive these days. Like the rest of the economy, we're dealing with reflation here and that the airlines just aren't able to bring back seats as fast as demand is recovering.

Yes. No, I've definitely seen it firsthand. Just one quick one on the Amazon. You did say it was fairly flat, but I suspect even though your fourth quarter seasonally is weaker than your third. Is that the quarter where you're going to have the highest from an Amazon? And I'm just thinking holiday shipping and the fact that I think everybody is running tight. Is that going to be your big quarter revenue-wise from a cargo perspective?

For this year, yes, I can't speak to the future. But this fourth quarter will be our highest volumes we've ever flown for them.

. Your next question comes from the line of Brandon Oglenski with Barclays.

So Jude, maybe can we follow up there on the comments about better yields? Because obviously, margins are coming down a little bit in the fourth quarter and probably a little bit due to fuel. So how does that change your behavior on the margin here on pricing and the outlook?

Yes. So we had the remnants of the Delta variant effects on bookings to kind of begin in late August and come basically affected through the end of October, but the beginning of November is weak anyway. But what we're sitting here right now looking at is a winter travel season, which for us is from Thanksgiving to Easter, which looks as good as we've ever seen. I mean there's no -- I mean, we have kind of maturity in our ancillary products, which are now producing in excess of $40 per passenger segment, which is up substantially from the 2019 comp -- winter '19, '20. And as Dave mentioned in his comments, load factors haven't quite got back to where they were, but yields are fully recovered. I mean -- we would add a lot more capacity if we had the ability to do so going into the winter season.

Yes. I think -- this is Dave, hey, Brandon. I think one of the things to think about is just the seasonality of this airline. Fourth quarter is typically weaker from a margin perspective than the third quarter anyway. As Jude points out, yields remain strong. We -- the guidance we gave for fourth quarter operating margin. The biggest effect on that number relative to where it would historically be is fuel. If you add sort of this big run-up in fuel sort of back to that number, we'd be typically seeing the same third to fourth quarter patterns that we see for this company yearly.

Got it. And I guess to those comments about you'd be flying more, if you could. What's the constraint right now? Because I think you hit your fleet expansion plans? And Dave, you spoke about what you plan to add to the fleet next year. I guess, is it pilot limitations? Is it airport capacity?

Yes, it's hiring pilot constraints. As with everywhere across the economy, labor is just tight right now, and we're seeing some of the same things. I would want to make the point we're hitting our head count objective, but there's some uncertainty in that. And so the way we deal with uncertainty is pull down some of what we wanted to fly with sched service. And then if we perform to the upside on our hiring or attrition is lower than what we had downside case forecasted, then we'll add more charters. And if you -- if we're sitting here talking in 90 days, and we have a higher charter production, that's why.

Got it. And then last one for me. I guess, hypothetically, if you could get all the pallets that you needed and you took utilization up, where could you have system capacity today relative to where you were prepandemic?

Well, I think a good rule of thumb would be 9 hours a day per passenger aircraft, which would be an increase of ASMs from where we have loaded of about 20% to 25%.

Yes. I think 1 thing to notice that's not just sort of staffing issue. I mean, there's still, as you pointed out, load factors remain a little low and demand remains a little bit weaker than it was sort of at prepandemic levels. So there's the impact on our capacity of just the overall environment relative to prepandemic levels and then some of the staffing constraints that you're talking about.

Yes, Brandon, just -- that was a great point. And I think the real -- so when we think about October, we were optimal. But there are periods of the calendar where we are capacity constrained every year always. And we're starting to enter that period basically Thanksgiving until early January and then mid-February to mid-April. It's never been the case that we didn't have enough demand for capacity. And so during those periods of time, yes, we could easily take utilization of 20%, 25%.

Your next question comes from the line of Chris Stathoulopoulos with Susquehanna.

So curious on the charter business, mostly commercial and there's the military piece as well. But given what looks to be a fairly strong peak season. Is there an opportunity? Or are you able to do any ad hoc flying for cargo within that segment?

Well, ad hoc, as we would define it, would be scheduled after we bid the pilot deck. So we're taking reserve pilots or open time, in other words, putting out to the pilots for volunteer. The opportunity in cargo is pretty close to zero for that because the fleet is allocated to Amazon, who in particular in this quarter were flying about as hard as we can with that fleet. We don't have any slack.

Remember, Chris, we're basically scheduled takers in our cargo business. So we operate Amazon schedule. So the seasonality of that business is really driven by, as someone pointed out earlier, holidays, Prime Day, that kind of stuff where they have busier periods than other periods and not so much us allocating things to that segment.

Okay. And a follow-up. So is your larger peers are focused on restarting business and long-haul international travel into 2022? Curious if you could give some color on the opportunities domestically. And as we look at your network, should we think about 2022 as filling out the schedule? Or adding more dots on the map? Or a little bit of both?

Chris, this is Grant. I think it was -- we've sort of shown what we're going to do and that we just extended our summer schedule, and we've had our winter schedule out there for a long time. And so the themes that we're really hitting on is building out Minneapolis to full potential. We're really happy with what we've been doing here just in terms of broadening our network, giving our customer base here in the Twin Cities opportunity to fly to new destinations. We're up to over 70 nonstop destinations from Minneapolis. You go back to 2019 and compare that to where we were, about 40%. So put that into context, through COVID, we're really happy about that development. But we also see opportunities outside of Minneapolis and take advantage of that. And we're going to be really nimble and agile to the business plan, and we feel like there's a lot of opportunity out there. And as Jude and Dave have mentioned, is sort of all the inputs come together, we can take advantage of that, and we will, and we will communicate it as it comes up. But we're -- but our schedule is out there, and we feel really good about how we're positioned in the schedule environment, but we're having these wins on the charter side and the cargo business is really consistent. So the plan for 2022 is coming together very nicely.

And that's consistent with our network strategy as communicated during the IPO. So for the Twin Cities, we want to be the leisure carrier for everybody paying with their own money. And then outside the Twin Cities, we want to be flexible capacity that can bring down fares during peak periods in large city origination market like Dallas.

At this time, there are no further questions. I would now like to turn the call over to Jude Bricker.

Well, thanks for your interest, everybody. Thanks for tuning in, and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.