Welcome to the Sun Country Airlines Third Quarter 2024 Earnings Call. My name is Daniel, and I will be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded. 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 group of others to help answer questions. Before we begin, I'd 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 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 on our most recent SEC filings. We assume no obligation to update any forward-looking statement. You can find our third quarter 2024 earnings press release on the Investor Relations portion of our website at ir.suncountry.com. With that said, I'd like to turn it over to Jude.

Thanks, Chris. Good morning, everyone. Happy Halloween. Our diversified 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 schedule flexibility and low fixed cost model allows us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to our structural advantages, we'll be able to reliably deliver industry-leading profitability throughout all cycles. Domestic industry capacity growth peaked in June at almost 7%, and the growth rate has been slowing ever since. But across our network, industry capacity reached a peak growth rate of 12%. By January, domestic industry capacity will be flat year-on-year and will be down across our network. Many airlines earnings calls have focused on a rationalization of capacity. Clearly, much of the capacity that other airlines added across our network was loss-making and has been removed. All the while, Sun Country continues to expand and produce profits and healthy cash flows. Selling unit revenues are now positive year-on-year for all future selling months. Flown unit revenues will lag, but we now expect fourth quarter TRASM year-on-year to be around flat. Based on industry schedules, I remain bullish on unit revenue trends into next year. Translating scheduled unit revenue trends into margins, we have positive trends in charter yields and cargo yields, both of which are contractual. We have mostly passed the post-COVID inflationary pressures and are expecting only modest ex-fuel unit cost increases going forward, and fuel is down. As shown in our 4Q guide, we believe we'll likely show a margin expansion. And based on current inputs, I remain bullish into 2025 as well. Another common topic on airline 3Q calls has been challenges with aircraft availability and OEM deliveries, and AOGs caused by OEMs. Again, to draw a distinction with our business, all the aircraft supporting our fleet growth for 2025 and 2026 are currently in operation with other carriers. They are either on our balance sheet as leased out until they are redelivered or committed through our cargo program. Further, borrowing costs are a common topic. Just to remind everyone, we continue to produce free cash flow and are able to self-fund our modest CapEx requirements. As such, our debt levels continue to decline even as we grow. As we ride these positive trends, this management team will primarily be focused on operational improvements and service delivery. This past summer was very challenging operationally as we discussed in the past and only to cap the season off with hurricanes and a major IT disruption. But since October -- August 1, we have achieved a 99.5% controllable completion factor. We have an incredible team that navigates these challenges, and I'm proud to be part of it. With that, I'll turn it over to Dave.

Thanks, Jude. We're pleased to report that Q3 was our ninth consecutive quarter of profitability, and year-to-date, Sun Country has among the highest margins in the industry. Both our Cargo segment and our charter line of business continue to produce solid growth, which has partially offset the capacity-driven pricing pressure we've experienced in the scheduled service business this year. As industry capacity continues to rationalize, we're seeing a stronger pricing environment in Q4 and into Q1 of '25. Sun Country has rapidly matched our capacity with market demand as Q3 scheduled service ASM growth fell to 5.8% year-over-year versus more than 18% in the second quarter. We're planning this growth to slow further in Q4 with scheduled service ASM growth expected to be slightly higher than 3% year-over-year. Let me now turn to the specifics of Q3. First to revenue and capacity. Third quarter total revenue was $249.5 million, which was roughly flat with the third quarter '23. Revenue for our Passenger segment, which includes our scheduled service and charter businesses, fell 3% year-over-year. Scheduled service revenue declined 5.9%, driven by an 11.1% decline in scheduled service TRASM. The quarter was impacted by industry overcapacity, the CrowdStrike outage and hurricanes in Florida. We rapidly reduced our scheduled service capacity as the quarter proceeded with July growing 12% versus prior year, but September shrinking by 10%. Given the length of our booking window, it generally takes a couple of quarters to fully realize the impact of capacity changes on flown fare levels. We feel confident that our current capacity allocation for Q4 and Q1 '25 matches customer demand, Q4 scheduled service TRASM is expected to be flat with Q4 '23 levels, and total TRASM, which includes our charter business, is expected to be up versus last year by low-single digits. Charter…

[Operator Instructions] Our first question comes from Duane Pfennigwerth with Evercore ISI.

So on Cargo, just with respect to the existing book of business that you're doing, have you hit full run rate on improvements on the existing business that you're doing? Or is some of that still building? And do you have any update on the timing of incremental cargo aircraft -- growth aircraft in 2025?

Yes. So the answer is not all of the rate changes that are implicit in our new agreement are included in that number. So a portion of them occurred this year, but there will be 2 more increases next year as the new aircraft deliver. We're really still looking to be on track for sort of the new cargo aircraft coming in, which would be late first, early second quarter for the first one and then by late third, early fourth quarter for the eighth one. So it's a rapid ramp during the summer months of 2025. And by the end of the year -- of next year, '25, all the aircraft should be operating and the rate changes should be fully in place.

Okay. Great. That's very clear. And then just on the seasonal flying that you do in scheduled service away from Minneapolis, any new thinking in your approach there? Any kind of new markets you're particularly excited about? And are the industry capacity adjustments that you're seeing any different in those seasonal markets away from Minneapolis?

Non-Minneapolis capacity -- Duane, non-Minneapolis capacity is primarily, at Sun Country, a summer issue. And we're going to be likely shrinking scheduled service capacity summer of '25 versus '24 because of the cargo inductions that Dave was talking about. So total block hours for the year will be up somewhere around 10%. So we're still hiring and growing sort of at a controlled but sustainable pace, but the mix will be different. So for summer of next year, our non-Minneapolis flying will be under some small pressure, so consider it mostly flat. I wouldn't expect any new markets for summer next year. We have a substantial -- we had a lot of market launches in the summer of '24 out of Minneapolis predominantly, some non-Minneapolis markets. And some of those will need to be -- will also need to be suspended in order to support the cargo growth.

And our next question comes from Ravi Shanker with Morgan Stanley.

This is Catherine on for Ravi. Just a quick question on the update on the Oman aircraft that you've leased. I was curious if those are going to continue to be on lease or if you're planning to add those to your fleet.

Yes. So here's where we stand with that. We will definitely be adding them to our fleet. Remember, we have 5 aircraft, which were scheduled to sort of -- one of them redeliver this year and go into service next year, and then all of them in place here at Sun Country by the end of next year. I think what's going to happen, given some of these OEM delays that are impacting other airlines, they want to extend leases, and we're no exception to that. So they want to extend the leases that we have to them. So I would say it's very likely that we extend at least a portion of those aircraft out into 2026 before they are redelivered, which works well for us given the cargo growth we have next year.

Got it. And then just a quick follow-up. I was curious what the RASM opportunity might be next year. Just given all this industry capacity has been coming out of the market, I was curious how you think about that impacting Sun Country.

Catherine, we just loaded summer schedules, so there's no meaningful volume of bookings past April. As I mentioned in my comments earlier, the first quarter bookings remain strong. We're seeing positive trends year-on-year. And so to the extent that we have data to look at in our own bookings beyond what other airlines have loaded in their schedules, things look really positive, but that's only through April.

And our next question comes from Brandon Oglenski with Barclays.

So should we still be thinking double-digit declines in your scheduled service capacity or block hour flying next year? Is that still the bogey?

Yes. So let me give a brief update on that. We're still finalizing the '25 plan, but I think -- so we originally thought that we were going to need to shrink our scheduled service business next year on the order of, let's say, 10%-ish. I think given the situation with our pilots, better availability than we thought, that shrink in our scheduled service business is probably more like mid-single digits type number. Again, we're finalizing right now, but I think we'll be able to fly a little bit more on the passenger side next year than we had initially thought.

Yes. You can look at loaded schedules and compare July year-on-year and June year-on-year, and you'll see down high-single digits. As we get more clarity on the delivery timing of the cargo fleet, there's a little bit of an input [indiscernible] is an unknown related to captain upgrades. We're not going to shrink from there. It will only go higher. So we'll continue to add scheduled service capacity as we become -- as the segment mix becomes clear and pilot staffing becomes more clear.

I appreciate that, Jude. And I guess there was a comment about your booking profile, it takes a few months for capacity reductions to start showing up in higher fares or higher realized fares, I guess. Is there anything you're changing given that capacity is likely to be down next year in the way you're holding inventory or pricing?

No. I think that comment, Brandon, was really more around just sort of leisure passengers and the tendency to book earlier, particularly given the leisure passenger mix that we have. So the only point was, as I think Jude mentioned, we're seeing nice upward trends, positive inflection year-over-year on a booked fare basis. But on a -- but that won't sort of flow into flown revenue for a quarter or so because people buy in advance and maybe a little bit more in advance when they're leisure passengers.

Our next question comes from Michael Linenberg with DB.

This is Shannon Doherty on for Mike. Dave, maybe a couple for you. With other revenue up 48% year-over-year, what drove that large increase?

I mean the biggest driver of that is our -- that's where the revenue from leased aircraft hits our P&L. So the aircraft that we have out on lease, we get revenue for, that's the line item where it's shown.

Okay. Got it. And how do you think about balancing deploying your free cash flow for share buybacks and other uses, just knowing that some shareholders may be limited to some extent from buying your stock due to your current market cap and trading liquidity?

Yes. So we had a sort of a share buyback program going for a while. Our free cash flow profile looks good. I would say we are very rapidly amortizing debt right now, and that will continue into the future. I don't really foresee us in a share buyback mode for the next couple of months. But as we move into '25, our cash is building rapidly. We're going to -- we'll sort of revisit this. There's always this trade-off for us and relatively limited float. People have difficulty getting in and out of the stock. As we buy back shares, it kind of exacerbates that. But we think our shares are a really good investment at this price. So as we move later this year into early next, we're going to revisit that.

Just one thing on cash balances. The end of the third quarter is the annual trough in the seasonality of our cash balances. So when you look at the balance sheet on the Q, just keep that in mind.

Our next question comes from Tom Fitzgerald with TD Cowen.

Just going back to the health of the booking window, especially in Minneapolis with carriers like JetBlue leaving. Could you touch on like how 7-day rolling yields have trended over the last 6 or 8 weeks or so?

Sure. I mean they're up. So 7-day trailing fares versus the same period last year are up in every selling month as we look forward where we have any significant volumes. And I mean -- also, I just want to point out that the calendar shift for leisure carriers like ours that's happened this year is really powerful. So it's a late Thanksgiving and a midweek Christmas and New Year's, it's sort of the best setup that we could hope for, combined also with the late Easter extends our winter travel season. So there's a really weak period between Thanksgiving and Christmas. That's a relatively short period this year. And then we have a long winter booking cycle because of a late Easter. So there's some other background that's kind of helping bookings like those things. But generally, on our biggest, thickest markets for this winter, we're all seeing -- in each of those markets, we're seeing really positive trends. So that's Minneapolis, Vegas, L.A., Orlando, Cancun, Fort Meyers. December bookings in West Florida haven't been really affected by the hurricane challenges. So November, we will see an impact, but that appears to be over by the time the December schedule starts. So bookings look really good.

That's super helpful. And then just as a follow-up, once you get into '26 and you have the Amazon -- the full comportment of the Amazon planes on board, how are you thinking about the seasonality of cargo block hours just kind of first half, second half? Any color there would be really helpful.

If you go look at sort of the revenue profile of the cargo business, it varies. The main variance quarter-to-quarter, honestly, is just check volume, like what aircraft are going through check at any one time. So the business has a great advantage for us in that it's quite flat throughout the year, and we expect that to continue. A little bit harder flying during Amazon Prime periods, but not that much. So it's a great, very stable business, and we expect that to continue as all the aircraft are in.

[Operator Instructions] And our next question comes from Scott Group with Wolfe.

I want to follow up on the cargo revenue per block hour. So I don't know if -- I see it's up 7% over last quarter, 16% year-over-year. Which is sort of in your mind is more representative of the new rate with Amazon? And I'll tell you what I'm trying to figure out, it sounds like there's 2 more increases coming. Should we think about these other 2 increases similar in magnitude as what we just got? And I'm just trying to understand ultimately by the back half next year, where this revenue per block able to go.

Yes. So the 16% year-over-year has got in at the annual rate escalators and then the other number you mentioned is quarter-over-quarter. I would say that without being too precise, that quarter-over-quarter number is more representative of one element of the new contractual rates. We have 2 more increases coming next year, which vary roughly in totality between the 2, should be roughly equivalent to the increase we saw in the number you mentioned. I don't -- I'm not going to get into detail of contractual rates here. But by the end of '26, everything -- sorry, end of '25, everything will be fully in.

I just want to bring up also the rate structure has a fixed component and then a departure component and a block hour component. So utilization, mostly subject to heavy check schedules, has some impact on the per block hour rate that you're looking at in the financials. So there's not only rate changes, there's also a little bit of noise associated with other things.

Yes, makes sense. You made a comment that fares booked are positive, RASM is flat in Q4 and people on leisure tend to book early. Do you feel like we should be able to -- does the fare positive translate into positive RASM in Q1, which is your big quarter? Or is it -- has there been enough early booking where we may not see the RASM inflection in Q1?

Yes, we're not going to guide to 1Q, but my point was only that the inflection happened a few months ago. So we were selling into flown months, October, November, December at a negative fare versus last year up until a few months ago. Now it's positive. It will take a while for total TRASM to catch up. But the further out in the schedule we look, the longer time we'll have of these positive booking trends, and the more bullish we become.

Okay. Makes sense. And then just lastly, there's obviously a lot of mix changes next year, schedule down, mid-single-digit cargo growth. What's a good way to think about CASM next year?

Yes. So the plan is still sort of coming together. CASM is going to be up because the passenger business is down, and the passenger business is what drives CASM, obviously, not the cargo business. I would say we're looking at numbers, let's just call it, mid-single-digit up next year in CASM, but that's subject to change here as we finalize our plan.

I'm showing no further questions at this time. I would now like to turn it back to Jude Bricker for closing remarks.

Hey, guys, thanks for your interest. I hope everybody has a great weekend. We're really excited about what we're seeing on booking trends, which we've talked about quite a lot this morning and look forward to giving you another update in 90 days. Have a great day, everybody.

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