Sun Country Airlines Holdings, Inc. (NASDAQ:SNCY) Q1 2023 Earnings Conference Call April 28, 2023 8:30 AM ET

Company Participants

Jude Bricker - CEO

Dave Davis - President & CFO

Grant Whitney - Chief Revenue Officer

Chris Allen - IR

Conference Call Participants

Duane Pfennigwerth - Evercore ISI

Ravi Shanker - Morgan Stanley

Catherine O'Brien - Goldman Sachs

Helane Becker - TD Cowen

Mike Linenberg - Deutsche Bank

Christopher Stathoulopoulos - Susquehanna

Operator

Hello, and welcome to the Sun Country Airlines First Quarter 2023 Earnings Call. My name is Andrew, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker 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, and 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 on management's current beliefs, expectations, and assumptions, and are subject to risks and uncertainties. Actual results may differ materially, and we encourage you to review the risk factors and cautionary statements outlined in our earnings release and our most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our first quarter earnings press release on the Investor Relations portion of our website at ir.suncountry.com.

With that said, I'd like to now turn the call over to Jude.

Jude Bricker

Thank you, Chris. Good morning, everyone. Our diversified business model is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we're 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 the industry-leading profitability throughout all cycles. Core to our low frequency model is being able to deliver excellent operational results. And again, we've done that and through a difficult winter. We finished the quarter with 99.9% controllable completion factor in our scheduled service. Thank you to all our team members working every day to deliver for our customers. I'm proud to announce our first quarter adjusted operating margin at 20%. I get plenty of questions from the investment community about what Sun Country results would look like in a normalized environment. I thought it'd be helpful to highlight some of the conditions in the first quarter, which are rare historically. First, fuel prices in the quarter were high. I'm not taking a market position on fuel. We manage fuel prices with our variable capacity model. Further, about 40% of our flying has fuel as a pass-through. I want to point out, however, that during peak periods like March, we fly as much as we're able. So, fuel prices during that time are passed through directly to results. Today, we're buying fuel about 60% cheaper than we were in the first quarter average price. Secondly, we had particularly challenging weather this winter in Minneapolis. Challenging weather isn't rare, but our network is focused on Minneapolis this time of year, and the Twin Cities had one of the top snowfall winners on record. That's probably good for demand, but drives a lot of costs in our business. We had two major snowstorms that shut down Minneapolis Airport, which is rare. The resulting cancels from these closures negatively affected results by several million dollars. Some regions of our network posted uncommon results that I don't think we should expect to be recurring. West Florida is a big part of our network this time of year. The region continues to recover from Hurricane Ian. We expect the region to be back next year with higher unit revenues and capacity. Minneapolis International, in contrast, was particularly strong this year. 1Q ‘22 was affected by Omicron, so year-over-year improvement was dramatic. I expect international capacity growth to moderate this region's TRASM in the future. Finally, and most impactful, we remain block hour-constrained due to staffing. In 1Q ‘19, we flew our aircraft 9.7 block hours per aircraft day on average. This quarter, our utilization was 7.3. Increasing flying on the same fleet will have substantial positive impact on results. In sum, I expect future 1Q margins to exceed 1Q ’23 more often than not.