Sun Country Airlines Holdings Stock

Sun Country Airlines Holdings, Inc. (Sun Country Airlines) operates as an air carrier.

The company, through its subsidiary, Sun Country, Inc., operates as a certificated air carrier providing scheduled passenger service, air cargo service, charter air transportation and related services. Services are provided to the general public, cargo customers, military branches, collegiate and professional sports teams, wholesale tour operators, schools, companies and other individual entities for air transportation to various U.S. and international destinations.

Sun Country Airlines is a new breed of hybrid air carrier that dynamically deploys shared resources across the company’s synergistic Scheduled Service, Charter, and Cargo businesses. The company focuses on serving leisure and VFR passengers, charter customers, and providing CMI service to Amazon, with flights throughout the United States and to destinations in Canada, Mexico, Central America, and the Caribbean. The company shares resources, such as flight crews, across the company’s Scheduled Service, Charter and Cargo business lines with the intention of mitigating the seasonality of the company’s route network. The company optimizes capacity using an agile peak demand scheduling strategy which aims to shift flying to markets during periods of peak demand and away from markets during periods of low demand.

The company flexes its capacity by day of the week, time of year and line of business to capture the most profitable, peak demand, flying opportunities available from both its MSP home market and the company’s network of non-MSP markets. In addition to these network shifts, the company shifts aircraft between its Scheduled Service and Charter businesses to maximize the return on the company’s assets. The company regularly schedules its fleet using what the company refers to as ‘Power Patterns’, which involves scheduling aircraft and crew on trips that combine Scheduled Service and Charter legs, dynamically replacing what would be lower margin Scheduled Service flights with Charter opportunities.

The company’s seats have an average pitch of approximately 31 inches, giving its customers comparable legroom to Southwest Airlines and greater legroom than all ULCCs in the United States. The company also provides seat-back power, complimentary in-flight entertainment and free beverages to improve the overall flying experience for the company’s customers.

Fleet

The company flies a single-family fleet of mid-life Boeing 737-NG aircraft, which allows the company to maintain a cost base comparable to ULCCs.

As of December 31, 2023, the company’s fleet consisted of 60 Boeing 737-NG aircraft. This includes 42 aircraft in the passenger fleet, 12 cargo operated aircraft through the ATSA with Amazon, and six aircraft that are on lease to unaffiliated airlines. The company’s fleet is managed through its two reportable segments: Passenger (which includes Scheduled Service and Charter) and Cargo.

Unique Business Model

Scheduled Service: The company’s Scheduled Service business combines low costs with a high-quality product to generate higher TRASM than ULCCs while maintaining lower Adjusted CASM than LCCs, resulting in best-in-class unit profitability. The company offers a high-quality product that is superior to ULCCs and consistent with that of LCCs. The company’s product includes non-stop flights to popular destinations, generous legroom, complimentary beverages, in-flight entertainment, and in-seat power. For the year ended December 31, 2023, the company flew 4.1 million Scheduled Service passengers.

The company provides low-fare passenger airline service primarily to leisure and VFR travelers. The company’s low fares are designed to stimulate demand from price-sensitive travelers seeking a superior product to ULCCs. The company operates its Scheduled Service business using a flexible capacity model focused on peak demand. The company’s flexible business model provides greater resiliency to economic and industry downturns than a traditional Scheduled Service carrier.

The company’s Scheduled Service business includes many cost characteristics of ULCCs, such as an unbundled product (which means the company offers a base fare and allows customers to purchase ancillary products and services for an additional fee), and point-to-point service. Sources of the company’s ancillary revenue include air travel-related services, such as baggage fees, seat selection and upgrade fees, priority check-in and boarding fees, other fees and on-board sales. Part of the company’s strategy is to reduce base fares to stimulate demand while increasing ancillary revenue per passenger, which offers passengers more choice and generates more ancillary revenue. The company’s on-board sales are also designed to enhance the customer experience, including local passenger favorite brands of beer, wine and spirits.

The company also earns revenue from its SCV products, including commissions from the sale of third-party hotel rooms and rental cars. The company’s SCV products facilitate booking a flight and land package at a discounted price for the company’s customers. The company offers vacation products to promote ‘one stop shopping’. The company’s Other Revenue also includes revenue from its co-branded credit card and rental revenue related to certain relationships where the company acts as an aircraft lessor.

Scheduled Service Route Network: As Minnesota’s hometown airline, a substantial portion of the company’s business is serving markets originating or ending in MSP. The company flies out of Terminal 2 at MSP, which is preferred by many flyers because of its smaller layout, shorter security wait times, close parking relative to check-in and full suite of retail shops. As of December 31, 2023, the company had access to eight of the 14 gates in Terminal 2.

The company’s MSP network served approximately 89 markets in 2023. As a result of the company’s focus on flying during seasonal peak periods, the company’s well-respected brand and product, and the company’s strong position in Minneapolis, the company has historically enjoyed a TRASM premium to other leisure airlines at MSP.

Since the start of 2023, the company has launched 23 new markets. As part of the ongoing assessment of market opportunities, the company continues to identify future growth opportunities, primarily from Midwest locations to warm weather leisure destinations and large markets with fragmented and seasonal demand peaks.

Charter: The company’s Charter business, which is one of the largest narrow body Charter operations in the United States, is a key component of the company’s strategy both because it provides inherent diversification and downside demand protection, and because it is synergistic with the company’s other businesses.

The company’s Charter business includes ad hoc, repeat, short-term and long-term service contracts with pass-through fuel arrangements and annual rate escalations. The company’s diverse Charter customer base includes, but is not limited to casino operators, the DoD, and collegiate and professional sports teams. In October 2021, the company signed a five-year agreement to provide Charter Service to all MLS teams. MLS features 29 clubs throughout the United States and Canada, in addition to future expansion teams. The company is a leading charter airline for collegiate sports, including the NCAA Championships, as well as individual team travel. In March 2022, the company began to provide Charter Service to Caesars Entertainment, Inc. This agreement restarted a relationship between the two organizations that had previously ended in 2020. The company also operates regularly scheduled VIP Charter Services to certain specified locations with continuous service and an aircraft outfitted with an all first-class configuration. For the year ended December 31, 2023, Charter block hours under long-term contracts comprised 80% of the total Charter flying performed.

Cargo: The company is flying 12 Boeing 737-800 cargo aircraft for Amazon. The company’s Cargo service, as performed under the ATSA, serves destinations within Amazon’s network. To the extent the company can optimize flight crew on cargo aircraft with overlapping Scheduled or Charter Service, the company attempts to capture those synergies as well, though they are not core to that line of business. However, like the Charter and Scheduled Service business, aircraft and crew utilization can be optimized by filling in Cargo service in periods when Scheduled Service and Charter flying is less profitable.

The company’s CMI service is asset-light, as Amazon supplies the aircraft and covers many of the operating expenses, including fuel, and provides all cargo loading and unloading services. The company is responsible for flying the aircraft under its air carrier certificate, crew, aircraft line maintenance and insurance, all of which allow the company to leverage its existing operational expertise from the company’s Scheduled Service and Charter businesses. The ATSA offers potential future growth opportunities by establishing a long-term partnership with Amazon.

Competition

The company’s key competitors on domestic routes include Alaska Airlines, Allegiant Travel Company, American Airlines, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines and United Airlines. The company’s Charter business competitors include charter-only operators Swift/iAero Airways, as well as other scheduled passenger carriers who also operate charter flying, such as Delta Air Lines.

The principal competitors for the company’s Cargo business include ATSG, Atlas Air, and Hawaiian Airlines.

Seasonality

The company’s passenger business is subject to significant seasonal fluctuations, especially the company’s Scheduled Service. For example, when the company’s scheduled flying demand is lower during the fall and early December, the company’s Cargo service remains consistent and grows until Christmas.

Traditionally, the company’s business is geared towards north to south travel from MSP and the upper Midwest in the winter months, the company’s strongest travel season. During the summer months, the company focuses on VFR traffic from MSP and leisure travelers originating in non-MSP markets. Although the company’s actual results vary by season, the company prides itself on the ability to adjust its route network and Charter Service to accommodate seasonality.

Distribution

The company sells its Scheduled Service flights through direct and indirect distribution channels with the goal of selling in the most efficient way across its customer base. The company’s direct distribution channels include its website and call center, and indirect distribution channels include third parties, such as travel agents and OTAs (e.g., Priceline and websites owned by Expedia, including Orbitz and Travelocity).

The company’s direct distribution channels are its lowest cost methods of distributing the company’s product. In addition, they provide more opportunities to sell ancillary products and services, such as baggage fees, seat selection and upgrade fees, priority check-in and boarding fees, and other fees. With the company’s Navitaire-based reservation system and enhanced website, the company has experienced a significant increase in the proportion of the company’s bookings that are sold through direct channels.

Indirect distribution channels remain important outlets to sell the company’s flights. The company’s movement in and out of markets where the company may not have an established brand presence, is facilitated by the availability of the company’s inventory through GDS companies (e.g., Amadeus, Sabre and Travelport). The company also generates sales through OTAs, which also broadens the company’s ability to sell in highly seasonal markets.

The company sells its Charter Services through an internal, dedicated sales team that is focused on long-term relationships with key customers, brokers, organizations, and college and professional sports teams. While the company’s CMI service is presently dedicated to Amazon and governed by the ATSA, the company may expand its Cargo business by marketing to new potential customers.

Marketing

The company is focused on direct-to-consumer marketing targeted at its core leisure and VFR travelers who pay for their own travel costs. The company’s marketing message is designed to convey its affordable and convenient flight options to leisure destinations. The company often includes its low base fares in marketing materials in order to stimulate demand.

The company’s marketing tools are its proprietary email distribution list consisting of over two million email addresses, the company’s Sun Country Rewards program, as well as advertisements online, on television, radio, digital billboards and other channels.

The company has a team of business development professionals who utilize business-to-business methods to identify opportunities and develop and maintain relationships with potential Charter customers. The company does not presently market its Cargo business.

Loyalty Program

The company’s Sun Country Rewards loyalty program rewards and encourages Scheduled Service customer loyalty and it is well tailored to serving the leisure passenger. The Sun Country Airlines co-branded credit card is the primary vehicle for the company’s customers to earn points and its loyalty program is geared specifically towards supporting adoption and continued use of the credit card. Sun Country Rewards offers award travel on every flight without blackout dates.

Technical Operations: Maintenance, Repairs and Overhaul

The company has an FAA mandated and approved maintenance program, which is administered by an experienced group of Technical Operations leaders. All of the company’s technicians are two-licensed Airframe and Powerplant and undergo extensive initial and recurrent training. Aircraft maintenance and repair consists of routine and non-routine maintenance. Work performed is divided into three general categories: line maintenance, heavy maintenance, and component maintenance.

The company maintains Sun Country technicians in Minneapolis, with limited line maintenance capabilities in Gulfport, Mississippi, Dallas-Fort Worth/Alliance Fort Worth, Texas, Lakeland Linder Airport, Florida, and Laughlin/Bullhead International Airport, Arizona.

The company maintains an inventory of spare engines to provide for continued operations during engine maintenance events. On the company’s cargo aircraft, heavy maintenance is a pass-through expense to the company’s customer, Amazon.

The company outsources component maintenance. Component maintenance consists of the ongoing and routine maintenance of aircraft components that are line replaceable units. These contracts cover the majority of the company’s aircraft component inventory acquisition, replacement and repairs, thereby reducing the need to carry extensive spare parts inventory.

The company is a longtime partner with Make-A-Wish Minnesota and provide flights for children with critical illnesses to help them safely travel to and from their wish destinations. Sun Country is a proud partner of the DoD.

Government Regulation

Aviation Regulation

The company holds an FAA air carrier certificate.

Security Regulation

The TSA and the CBP, each a division of the U.S. Department of Homeland Security, are responsible for certain civil aviation security matters, including passenger and baggage screening at the U.S. airports, and international passenger prescreening prior to entry into or departure from the United States. International flights are subject to customs, border, immigration and similar requirements of equivalent foreign governmental agencies. The company is in compliance with all directives issued by such agencies.

History

The company, a Delaware corporation, was founded in 1983. It was incorporated in 2017. The company was formerly known as SCA Acquisition Holdings, LLC and changed its name to Sun Country Airlines Holdings, Inc. in 2020.