Yahoo Finance Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) Q3 2023 Earnings Call Transcript
Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Welcome to the Sun Country Airlines Third Quarter 2023 Earnings Call. My name is Crystal Love, and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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.
Chris Allen: Thank you. I'm joined today by Jude Bricker, Chief Executive Officer; Dave Davis, President and Chief Financial Officer; and a 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 third quarter earnings press release under the Investor Relations portion of our website at ir.suncountry.com. With that said, I'd like to turn the call over to Jude.
Jude Bricker: Thanks, Chris. Thanks for joining us this afternoon, everyone. 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 scheduled 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 will be able to reliably deliver industry-leading profitability throughout all cycles. Today, we're announcing 3Q results, including an adjusted operating margin of over 8% on 18.5% year-on-year departure growth. We know now these results produced the highest trailing 12-month pre-tax margin of any of the 11 public mainline U.S. carriers.
The same was true at the end of the second quarter. Demand remained strong across all segments of our business, highlighted by scheduled service TRASM down 5% on 15% ASM growth versus prior year. Since the beginning of the year, every month, scheduled service TRASM has reset to around 35%, higher than pre-COVID comps, with this trend generally continuing into bookings on future travel. Also, our charter block hour production, critical during the fall of scheduled service demand trough, was up over 14% year-on-year. Recall that the third and fourth quarters typically produce margins well below our annual production. We continue to deliver a high-quality product. In the third quarter, our controllable completion factor was 99.4%, while delivering the highest D0 among U.S. mainline carriers.
I'm so grateful to all our team members that worked so hard to take care of our customers every day. Unfortunately, the cause of our variance of performance to potential remains crew staffing levels. Due to captain availability, we flew about 3,500 fewer block hours in the third quarter, mostly in July, when the demand environment would have supported with our fleet and the fuel price input. We continue to see staffing levels improve, albeit more slowly than we would like. Looking ahead, we recently extended our schedule through the summer of 2024 and announced 10 new Minneapolis markets. I think this is representative of our growth for the next few years as we continue to expand into our Minneapolis opportunity during peak periods, supported by modest off-peak growth in our charter business.
As our growth has moderated based on pilot staffing, we've decided to lease out two additional aircraft that were scheduled to enter our fleet in Q4. This will delay the entry into service of two 737-800s planned for the fourth quarter of 2023 until the first quarter of 2025. Aircraft are generally in high demand as much of the aviation industry deals with production delays on new narrow-bodies and service disruptions from the GTF. So, we'll make good returns on these aircraft until we're able to fully utilize them. With that, I'll turn it over to you, Dave.
Dave Davis: Thanks, Jude. Q3 was another profitable quarter for Sun Country with revenue finishing at the upper-end of our guided range and operating margin finishing in the middle of our guided range, despite incurring a fuel price that was 10% higher than expected. Total revenue increased 12.3% year-over-year to $248.9 million, while adjusted earnings before taxes were $11.1 million versus $9.7 million in Q3 of 2022. Adjusted operating margin was 8.1% for the quarter and 14.7% year-to-date. As Jude mentioned, on a trailing 12-month basis, Sun Country's adjusted pre-tax margin through Q3 was 10.2%. This was the highest of the 11 publicly-traded mainline U.S. carriers. The strength of our diversified business model continues to be demonstrated by our strong results.
Revenue for our passenger segment continued to grow in Q3, with combined scheduled service and charter revenue increasing 9.7% year-over-year to $214.4 million. Scheduled service plus ancillary sales generated $166.9 million in revenue, which was 9.5% higher than last year. Scheduled service TRASM was $0.1172, which was 5% lower than last year and a 15.1% growth in scheduled service ASMs. We're still maintaining remarkable scheduled service TRASM strength versus 2019. Q3 2023 was almost 39% higher than Q3 2019. This marks our sixth consecutive quarter of scheduled service TRASM being at least 25% higher versus its comparable quarter in 2019. We do not expect this streak to end in Q4. Our total fare per passenger declined 8.7% to $153.11, while we maintained an 86.6% load factor.
Charter revenue in the third quarter grew 10.6% to $47.4 million on block hour growth of 14.1%. A portion of our charter revenue consists of reimbursement from customers for changes in fuel prices as we do not take fuel risk on our charter flying. Q3 fuel prices dropped by over 18.8% year-over-year. And if you exclude the fuel reimbursement revenue from both Q3 '23 and Q3 '22, charter flying revenue grew 14.6% over the period, which is in line with block hour growth, producing flat year-over-year charter revenue per block hour. Third quarter cargo revenue grew 10% to $26 million on a 6.3% increase in block hours. Last year, we had lower levels of flying due to scheduled maintenance events, and the annual increases in our Amazon contract occurred in December of 2022.
We're continuing to grow at a profitable and measured pace. We expect total ASM growth in Q4 of this year to be between 8% and 10%. We anticipate a similar growth rate to continue for full year of 2024. Turning now to costs. Total operating expenses increased 11.4% on a 14.4% increase in total block hours in the third quarter. Adjusted CASM was up 2.6% versus Q3 of '22. This year-over-year change is down significantly from the 10%-plus increases we experienced in the first half of 2023. The timing of maintenance events in Q3 was a large contributor to our year-over-year cost increase as airframe check volume doubled from Q3 of '22 and material price increases were almost 9%. Looking into Q4, we expect heavy check volume to remain high relative to Q4 of '22.
Shifting focus to 2024 for a minute, we are anticipating adjusted CASM to be roughly flat versus full year 2023. Let me switch to the balance sheet. Our total liquidity at the end of Q3 was $198 million, which was lower than the amount at the end of Q2, primarily due to the seasonality of bookings and the timing of our share repurchases, which finished towards the end of the quarter. As of November 6, our total liquidity was $230 million. Through the end of September, we've spent $210.6 million on CapEx, which has funded a significant amount of our planned aircraft growth into 2025. We anticipate our full-year 2023 CapEx to be approximately $225 million and our year-ending passenger fleet count to be 42 aircraft. Fleet growth in 2024 will be modest, and the majority of our growth will be funded through higher utilization.
We expect 2024 capital expenditures to be well under half of the 2023 level and free cash flow generation to be strong. We continue to maintain a very strong balance sheet. Our net debt-to-adjusted EBITDA ratio at the end of Q3 was 2.4 times. Since we do not have a significant debt burden, we have flexibility in how we deploy our cash. Since Q4 of 2022, we spent approximately $80 million on share repurchases, which is the total amount that our Board had authorized. Just recently, our Board authorized another $25 million in repurchase authority, which we plan to deploy opportunistically. Turning to guidance. We are anticipating Q4 total revenue to be between $242 million and $252 million, an increase of 7% to 11% versus Q4 of '22 on a block -- and an increase in block hours of 11% to 15%.
We're forecasting a $3.20 per gallon fuel price in the fourth quarter, and adjusted op margin for the quarter is forecasted to be between 3% and 5%. The fundamentals of our unique diversified business remain strong, and our model is highly resilient to changes in macroeconomic conditions. Our focus remains on profitable growth. And with that, I'll open it up for questions.
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