Sun ntry Airlines (SNCY) - 2022 Q4 - Annual Report

Table of Contents Glossary of Terms This section provides definitions for key terms used throughout the annual report, such as 'Adjusted CASM,' 'Available seat miles (ASMs),' 'Ancillary revenue,' 'Block hours,' 'CASM,' 'CMI service,' 'Load factor,' 'Revenue passenger miles (RPMs),' 'TRASM,' and various regulatory and organizational acronyms. These definitions are crucial for understanding the company's operational and financial metrics - Key operational and financial terms are defined to ensure clarity throughout the report[13][14] - Definitions include metrics like CASM (Cost per Available Seat Mile), ASMs (Available Seat Miles), RPMs (Revenue Passenger Miles), and TRASM (Total Revenue per Available Seat Mile)[23][27][46][49] - Important business model terms such as 'Ancillary revenue' (baggage fees, seat selection, etc.) and 'CMI service' (crew, maintenance, and insurance for cargo operations, primarily for Amazon) are explained[19][30] Cautionary Note Regarding Forward-Looking Statements This section advises readers that the annual report contains forward-looking statements, which involve known and unknown risks and uncertainties that could cause actual results to differ materially from expectations. It emphasizes that these statements are based on assumptions and are subject to risks detailed in the 'Risk Factors' section, and the company undertakes no obligation to update them - The report contains forward-looking statements identified by terms like 'anticipate,' 'believe,' 'expect,' 'intend,' 'may,' 'plan,' 'project,' 'will,' and 'would'[53] - These statements are subject to known and unknown risks, uncertainties, and important factors that may cause actual results to differ materially from those expressed or implied[54] - Readers are cautioned not to place undue reliance on forward-looking statements, and the company does not commit to updating them publicly unless required by law[54] Summary of Principal Risk Factors This section provides a high-level overview of the main risks and uncertainties that could impact the company's business, results of operations, financial condition, or stock price. Key risks include the ongoing effects of COVID-19, economic conditions (including inflation), fuel price volatility, competitive industry pressures, factors beyond company control (weather, air traffic), regulatory changes, labor shortages, and reliance on technology and third parties - The business is subject to risks from COVID-19 variants, travel restrictions, and decreased demand for air travel[58] - Economic conditions, including inflationary pressures and the volatile price/availability of aircraft fuel, pose significant risks[58] - Operational challenges include intense industry competition, factors beyond control (weather, air traffic congestion), security concerns, and labor shortages (especially pilots and technicians)[58] - Regulatory changes, particularly those related to ancillary services, GHG emissions, and international market presence, could adversely affect operations[58] PART I Item 1. Business Sun Country Airlines operates a hybrid low-cost model, integrating scheduled passenger service, charter, and cargo businesses to achieve high growth, margins, and cash flows. The company leverages shared resources, particularly flight crews, across these segments to optimize capacity and mitigate seasonality. As of December 31, 2022, it operated a fleet of 54 Boeing 737-NG aircraft, serving leisure and VFR passengers, charter clients (DoD, sports teams, casinos), and providing CMI services to Amazon. The business model emphasizes low costs, a high-quality product, and an agile scheduling strategy to adapt to demand fluctuations Overview - Sun Country Airlines operates a hybrid low-cost model across scheduled service, charter, and cargo businesses[60] - The model aims for high growth, margins, and cash flows by dynamically deploying shared resources like flight crews[60] - As of December 31, 2022, the fleet consisted of 54 Boeing 737-NG aircraft (42 passenger, 12 cargo for Amazon)[61] Our Unique Business Model - The scheduled service combines low costs (comparable to ULCCs) with a high-quality product (superior to ULCCs, consistent with LCCs) to achieve best-in-class unit profitability[62] - Ancillary revenue is a key component, generated from services like baggage fees, seat selection, and on-board sales, complementing low base fares[64] Scheduled Service Passenger and Ancillary Data | Metric | 2022 | 2021 | 2020 | | :----------------------------- | :--------- | :--------- | :--------- | | Scheduled Service Passengers | 3.6 million | 2.7 million | 1.7 million | | Average Base Fare per Passenger | $121.80 | $102.21 | $114.96 | | Average Ancillary Revenue per Passenger | $53.49 | $42.89 | $40.53 | - The charter business is one of the largest narrow-body operations in the U.S., providing diversification, downside protection, and synergy with other businesses. Customers include casino operators, the U.S. Department of Defense, and sports teams[71][73][74] - The cargo business, primarily CMI service for Amazon under a six-year ATSA (with two two-year extensions), is asset-light for Sun Country as Amazon supplies aircraft and covers many operating expenses. It provides consistent cash flows and leverages existing operational expertise[75][76][77] - The COVID-19 pandemic significantly impacted demand in 2020 and 2021, but demand increased in 2022, making results not fully comparable to prior periods[78][79] Our Competitive Strengths - Diversified and Resilient Business Model: Unique in the airline sector, combining leisure/VFR passengers, charter, and e-commerce cargo to mitigate economic downturns[80] - Agile Peak Demand Scheduling Strategy: Capacity is flexed by day, month, and business line to capture most profitable flying opportunities, including 'Power Patterns' combining scheduled and charter legs[81][84] - Tactical Mid-Life Fleet with Flexible Operations: Acquires mid-life Boeing 737-800s for lower ownership costs, allowing lower utilization during low demand and no large future capital expenditures from aircraft orders[85] - Superior Low-Cost Product and Brand: Offers a cabin experience with generous legroom, complimentary beverages, in-flight entertainment, and in-seat power, along with an improved digital booking experience (71% direct bookings in 2022)[86][87] CASM and Adjusted CASM Trends | Metric | 2022 | 2020 | | :---------------- | :----- | :----- | | CASM (cents) | 12.39 | 8.91 | | Adjusted CASM (cents) | 7.04 | 7.57 | - Strong Position in MSP Home Market: Largest ULCC at Minneapolis-St. Paul International Airport (MSP), with growing nonstop destinations and a preferred Terminal 2 presence[88] - Seasoned Management Team: Led by CEO Jude Bricker and President/CFO Dave Davis, with extensive aviation industry experience[89] Competition - The airline industry is highly competitive, with principal factors including ticket prices, flight schedules, amenities, customer service, and frequent flyer programs[90] - Scheduled service competitors include legacy network airlines (Delta, American, United, Hawaiian) and low-cost carriers (Alaska, Allegiant, Frontier, JetBlue, Southwest, Spirit)[91] - Charter business competitors include charter-only operators (Swift/iAero Airways) and other scheduled passenger carriers (Delta Air Lines)[91] - Cargo business competitors include ATSG, Southern Air, and Hawaiian Airlines, with Sun Country maintaining a stable position with Amazon due to operational performance[92] - Sun Country's competitive advantages include its diversified business model, agile scheduling, mid-life fleet, low-cost product, strong MSP market position, and seasoned management[93] Seasonality - The airline industry experiences significant seasonal demand fluctuations, which Sun Country's network strategy is designed to leverage by concentrating flying in strong demand seasons[97] - Passenger business is highly seasonal, with strongest travel in winter months (north to south from MSP) and a focus on VFR traffic and leisure travelers from non-MSP markets in summer[98] - Cargo operations help mitigate seasonal troughs in the passenger business by maintaining consistent and growing service until Christmas[97] Distribution - Scheduled service flights are sold through direct channels (website, call center) and indirect channels (travel agents, OTAs, GDSs)[99] - Direct channels are preferred for lower costs and more opportunities to sell ancillary products[100] Direct vs. Indirect Distribution Channel Sales | Channel Type | 2022 | 2021 | 2020 | | :------------- | :--- | :--- | :--- | | Direct Channels | 73% | 75% | 71% | | Indirect Channels | 27% | 25% | 29% | - Charter services are sold via an internal sales team focused on long-term relationships, while cargo business is dedicated to Amazon under the ATSA[102] Marketing - Marketing focuses on direct-to-consumer strategies for leisure and VFR travelers, emphasizing affordable and convenient flight options with low base fares[103] - Marketing tools include an email distribution list of over one million addresses, the Sun Country Rewards program, and advertisements across various media[104] - A business development team handles charter customer relationships; cargo business is not currently marketed[105] Loyalty Program - The Sun Country Rewards program encourages scheduled service customer loyalty, allowing points to be applied towards air travel purchases[106] - The co-branded credit card is the primary vehicle for earning points, which do not expire for cardholders[106] - The program offers award travel on every flight without blackout dates, making it valuable for less frequent leisure travelers[106] Customers - Primary customers are price-sensitive leisure and VFR travelers who respond to low base fares and appreciate choice in purchasing products/services[107][108] - Charter operations serve repeat customers like casinos, college, and professional sports teams, offering tailored schedules and reliable service[109] - The cargo business is dedicated to Amazon, with potential for future growth with Amazon and new customers[110] Operational Performance - The company prioritizes excellent operational performance, especially in extreme weather, to support its peak demand model and strengthen customer loyalty[111] - Completion factor is the primary operational metric due to less-than-daily market operations[111] Completion Factor (Percentage) | Year | Completion Factor | | :--- | :---------------- | | 2022 | 98.8% | | 2021 | 99.4% | | 2020 | 96.8% | - Sun Country's completion factor compares favorably to key competitor airlines[111] Aircraft Fuel - Aircraft fuel is a major expense, representing a significant portion of total operating costs[114] Aircraft Fuel Costs and Consumption | Metric | 2022 | 2021 | 2020 | | :------------------------------------------ | :------- | :------- | :------- | | Fuel Gallons Consumed (in thousands) | 71,690 | 60,739 | 43,844 | | Fuel Cost per Gallon (excluding derivatives) | $3.75 | $2.19 | $1.58 | | % of Total Operating Costs | 32% | 25% | 22% | - Fuel prices are volatile due to global economic and geopolitical factors[114] - The company may use fuel derivative contracts to mitigate price volatility but had no hedges in place as of December 31, 2022, and no plans to hedge going forward, as charter and cargo operations have pass-through fuel provisions[115] Technical Operations: Maintenance, Repairs and Overhaul - The company has an FAA-approved maintenance program, with technicians holding two licenses (Airframe and Powerplant)[116] - Maintenance is categorized into line maintenance (performed by employees and contractors), heavy maintenance (outsourced for engines, landing gear, airframes), and component maintenance (outsourced)[117][118][119] - Heavy maintenance for cargo aircraft is a pass-through expense to Amazon[118] Human Capital - As of December 31, 2022, the company had 2,510 employees, with approximately 53% represented by labor unions[120][122] Union Representation and Agreement Status (as of Dec 31, 2022) | Employee Group | Number of Employees | Union | Status of Agreement/Amendable Date | | :--------------- | :------------------ | :---- | :--------------------------------- | | Pilots | 571 | ALPA | Amendable in December 2025 | | Flight Attendants | 547 | IBT | Currently amendable (commenced Dec 2019) | | Dispatchers | 32 | TWU | Amendable in November 2024 | | Technicians and related craft employees | 177 | AMFA | New contract in negotiations | - Fleet service employees (cargo, commissary/catering, ramp agents, bag room agents) elected IBT representation on January 4, 2023, with negotiations not yet begun[125] - Labor relations are governed by the Railway Labor Act (RLA), which outlines a multi-stage bargaining process for amendable agreements[126] Safety and Security - Safety and security are the company's top priorities, guided by procedures and policies, with annual safety culture surveys to identify improvements[127][128] - Program investments include Flight Operations Quality Assurance (FOQA), CEFA animation software for pilot training, new training devices, Line Operations Safety Audit (LOSA), and ProSafeT for anonymous reporting[129][135] - Information from safety programs is used to monitor the health of the Safety Management System (SMS) and Security Management System (SeMS)[131] Insurance - The company maintains customary airline industry insurance policies, including liability coverage for public/passenger injury, property damage, flight equipment loss, and war risk (terrorism)[132] Foreign Ownership - Federal law and DOT policy require the company to be owned and controlled by U.S. citizens, with restrictions on non-U.S. citizen voting stock (no more than 25%) and total stock ownership (no more than 49% from 'open skies' countries)[133] - The company is currently in compliance with these ownership provisions[133] Government Regulation - The airline industry is heavily regulated by federal authorities, primarily the DOT (economic operating authority, consumer protection) and the FAA (safety of flight operations)[134][135][137] - International flights are subject to air transport agreements and foreign government regulations, with Mexico flights governed by a liberalized bilateral agreement[136] - Airport access is regulated by the FAA, which allocates take-off and landing slots. The company operates at Level 2 airports (SFO, LAX, ORD, EWR) and will operate at Level 3 JFK in April 2023[138] - Consumer protection regulations by the DOT cover advertising, denied boarding, refunds, baggage liability, and disability transportation[140] - Security is regulated by the TSA and CBP, including passenger/baggage screening and international prescreening[141] - Environmental regulations include laws on air emissions (GHG), noise emissions, water discharges, and hazardous materials. ICAO and EPA are developing new CO2 and GHG emissions standards[143][145] - CORSIA, a global market-based emissions offset program, will increase operating costs for international flights, implemented in phases from 2019 to 2027[146] - Noise regulations, including local abatement procedures and potential ICAO restrictions, could impact operations[147] Available Information - The company makes its annual, quarterly, and current reports (10-K, 10-Q, 8-K) available free of charge on its website (www.suncountry.com) and through the SEC's website (www.sec.gov)[149](index=149&type=chunk) ITEM 1A: RISK FACTORS This section details significant risks that could materially and adversely affect Sun Country Airlines' business, financial condition, and results of operations. These risks span industry-specific challenges like the lingering impact of COVID-19, economic sensitivity, fuel price volatility, intense competition, and regulatory burdens. Business-specific risks include the concentration of cargo business with Amazon, reliance on a low-cost structure, dependence on the Minneapolis-St. Paul hub, potential for accidents, cybersecurity threats, reliance on third-party providers, and labor relations. Financial risks involve liquidity, access to capital, maintenance costs, and fixed obligations. Ownership-related risks include stock price volatility, 'emerging growth company' status, foreign ownership limitations, and the influence of the Apollo Stockholder Risks Related to Our Industry - The COVID-19 pandemic and its variants have significantly impacted demand for air travel, leading to material declines in results and ongoing uncertainty[151][153][154] - Demand for airline services is highly sensitive to economic conditions; a recession or downturn would weaken demand for both passenger and cargo services[160] - Inflationary pressures can increase operating expenses and negatively impact customer demand for air travel[162] - Aircraft fuel price volatility is a major risk, as fuel is one of the largest operating expenses (32% in 2022). The company may not be able to fully pass on increased fuel costs[163][165] - Terrorist attacks or security concerns could cause substantial revenue losses and increased security costs, negatively impacting demand[169] - The airline industry is exceedingly competitive, facing new entrants, ULCCs, LCCs, and legacy network airlines, leading to potential price discounting and fare wars[170][171][179] - Factors beyond control, such as air traffic congestion, adverse weather, government shutdowns, and disease outbreaks, can cause flight delays, cancellations, and increased costs[180][182] - A shortage of qualified pilots, mechanics, and other personnel due to retirements, increased competition, and stricter regulations could adversely affect operations and increase costs[183] - Operating in international markets exposes the company to political/economic instability and the need to comply with diverse legal requirements[184][186] - Increases in insurance costs or reductions in coverage, especially for war risk, could materially affect financial condition[187][188] - The airline industry is heavily taxed, with various government fees and taxes potentially reducing demand and profitability[189][190] - Restrictions or increased taxes on ancillary products and services, a core part of the business strategy, could harm revenue and financial condition[191] - Climate change concerns are leading to increased regulation and taxation of aircraft emissions (e.g., ICAO CO2 standards, CORSIA), potentially increasing operating costs[192][194][196] - Competition from air travel substitutes, such as bus, train, or video teleconferencing, could limit demand, especially for leisure travelers[197] - Compliance with extensive regulations from the FAA, DOT, TSA, and other agencies can increase costs and affect operations, including potential grounding of aircraft or new consumer protection rules[198][201][212][213][214] Risks Related to Our Business - Failure to successfully implement the business strategy, including fleet growth, market expansion, ancillary offerings, and charter service growth, could materially affect the business[215] - Challenges in growth include maintaining low unit costs, optimal aircraft utilization, sufficient staffing, airport access, and operational performance[216] - The cargo business is highly concentrated with Amazon, making it vulnerable to decreases in flying volumes, cost increases, or termination of the ATSA[220][224] - Inability to control costs, such as fuel, insurance, aircraft acquisition, and labor, could erode the primary competitive advantage of a low-cost structure[225] - Business is significantly tied to the Minneapolis-St. Paul (MSP) hub, making it vulnerable to local economic/geophysical factors, increased competition, or disruptions[226][227] - An accident or public incident involving aircraft or personnel could lead to significant losses, adverse publicity, and reputational harm[229][230] - Cybersecurity breaches or unauthorized use of IT infrastructure could compromise sensitive information, leading to liability, reputational damage, and increased costs[231][234][235] - Reliance on third-party providers for critical functions (ground handling, maintenance, reservations) exposes the company to risks if these providers fail to perform or cease to serve[236][237] - Dependence on third-party distribution channels (GDS, OTAs) for ticket sales can lead to higher costs and less flexibility compared to direct channels[238] - Heavy reliance on technology and automated systems means disruptions or failures (e.g., reservation system, operational control) could materially affect business[239][240] - Inability to grow or maintain unit revenues or ancillary revenues could harm financial performance, as these are key to the business strategy[243][244] - Operating a single aircraft type (Boeing 737-NG) makes the company vulnerable to design defects, mechanical problems, or negative public perception related to that specific aircraft[245] - Increased labor costs, union disputes, strikes, or inability to attract/retain qualified personnel could adversely affect the business, especially with a significant unionized workforce[246][249][252] - Efficient daily aircraft utilization, while a strategy, makes the company vulnerable to flight delays or cancellations during peak demand periods due to limited recovery options[250] - Fluctuating maintenance costs, including substantial periodic costs for scheduled overhauls and unpredictable unscheduled repairs, can negatively affect operating results[262][263] - Inability to expand or operate reliably/efficiently out of airports due to actions by authorities (e.g., increased fees, slot limitations) could harm the business[254][255] - Inability to protect intellectual property rights, particularly branding, could diminish competitiveness[256] - Negative publicity, especially through social media, regarding customer service or operational issues, could harm reputation and brand[257][258] - High dependence on cash, investments, operating cash flows, and the Revolving Credit Facility means insufficient funds could lead to default on obligations[259] - Imposition of holdback restrictions by credit card processors could significantly impact liquidity[260] - Limited ability to obtain financing or access capital markets could hinder aircraft acquisition and growth plans[261] - Significant aircraft and other fixed obligations could impair liquidity and financial condition[265][266] - Dependence on Delta Air Lines as a sole-source supplier for most aircraft parts creates vulnerability to supply disruptions or performance issues[267] - Reduction in demand or operating capacity limitations in key markets (U.S., Canada, Mexico, Caribbean) or for charter/cargo operations could harm the business[268] - Loss of key personnel, particularly senior management, could materially adversely affect the business[269] - Quarterly results fluctuate due to seasonality, competitive responses, fuel prices, and maintenance expenses, making comparisons unreliable[270] - Failure to realize estimated cost savings from operational improvements and initiatives could negatively impact results[271] - Involvement in litigation, including consumer complaints, can be costly, time-consuming, and divert management attention[272][273] Risks Related to Our Indebtedness - The Credit Agreement and future indebtedness may contain restrictive covenants limiting flexibility in business activities, financing, and capital needs[274] - Failure to comply with covenants could lead to acceleration of indebtedness[274] - Participation in governmental programs like the CARES Act imposes restrictions (e.g., on executive compensation until April 1, 2023) that could affect operations and ability to retain management[275][276][278] Risks Related to Ownership of Our Common Stock - The market price of common stock may fluctuate significantly due to operating performance, market conditions, competitor actions, and general economic factors[280] - As an 'emerging growth company,' the company benefits from reduced disclosure requirements, which might make its common stock less attractive to some investors[281] - Operating as a public company incurs significant legal, accounting, and compliance costs, especially after losing 'emerging growth company' status[282][286] - The certificate of incorporation and bylaws limit ownership and voting by non-U.S. citizens to comply with federal law, potentially impacting stock price[288][289] - The Apollo Stockholder (beneficially owning ~43% of voting power) has significant influence, and its interests may conflict with other stockholders[290][291] - As a holding company, reliance on dividends and distributions from subsidiaries to meet obligations, which can be restricted by debt agreements, poses a risk[292] - Warrants granted to Amazon (exercise price ~$15.17/share, 25% vested as of Dec 31, 2022) could dilute existing stockholders' ownership and affect stock price upon exercise[293] - Future sales of common stock by existing stockholders (e.g., Apollo, Amazon) or the perception of such sales could reduce the stock price[294][295] - The company does not anticipate paying dividends in the foreseeable future, meaning capital appreciation is the only source of gain for stockholders[296] - Obligation to pay pre-IPO stockholders for certain tax benefits under a Tax Receivable Agreement (TRA) could be material (estimated $103.8 million as of Dec 31, 2022) and impact liquidity[297][299][300] - A material weakness in internal control over financial reporting (specifically in accounting for complex, non-routine transactions like aircraft purchases under ASC Topic 842) was identified, which could affect the accuracy and timeliness of financial reporting[303][304][306] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments were reported[307] Item 2. Properties Sun Country Airlines operates a fleet of 54 Boeing 737-NG aircraft, comprising 42 passenger aircraft (mostly owned or finance leased) and 12 cargo freighters subleased from Amazon. The company's facilities strategy emphasizes flexible common use agreements at most airports, with a primary hub at MSP Terminal 2, where it has priority access to gates and leases two hangars for maintenance and corporate headquarters Aircraft Fleet - As of December 31, 2022, the fleet consisted of 54 Boeing 737-NG aircraft (53 Boeing 737-800s and one Boeing 737-700)[308] - The passenger fleet comprises 42 aircraft, with an average age of approximately 15 years; 13 are leased (operating or finance leases), 26 are financed owned, and 3 are unencumbered owned[309] - The company has a commitment to lease three additional aircraft for delivery in late 2023 and early 2024[310] - The cargo fleet consists of 12 Boeing 737-800 freighters, with an average age of 20 years, subleased from Amazon and not recognized as lease assets under ASC 842[311] Facilities - Most airport facilities are used under flexible common use agreements or on a per-use basis, supporting the strategy of entering and exiting markets[312] - The primary hub is MSP Terminal 2, where the company operates out of eight of 14 gates, with five assigned on a priority basis[313] - Leased facilities at MSP include a 108,000 sq ft maintenance hangar and a 90,000 sq ft office/hangar facility converted into corporate headquarters[314][315] Item 3. Legal Proceedings The company is involved in commercial litigation and administrative/regulatory proceedings as part of its normal business operations. Management believes the ultimate outcome of these matters will not have a material adverse effect on its financial position, liquidity, or results of operations - The company is subject to commercial litigation and administrative/regulatory proceedings in the normal course of business[316] - Management believes these proceedings will not materially adversely affect financial position, liquidity, or results of operations[316] Item 4. Mine Safety Disclosures This item is not applicable to Sun Country Airlines Holdings, Inc - This item is not applicable[317] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Sun Country Airlines' common stock began trading on Nasdaq under 'SNCY' on March 17, 2021. As of December 31, 2022, there were 57,325,238 shares outstanding. The company has not paid cash dividends and does not anticipate doing so in the foreseeable future, prioritizing reinvestment and debt repayment. The Board authorized a $50 million stock repurchase program in October 2022, under which $25 million was executed via an accelerated share repurchase, resulting in 1,371,518 shares repurchased by January 2023 Market Information - Common stock began trading on the Nasdaq Global Select Market under the symbol 'SNCY' on March 17, 2021[318] - As of December 31, 2022, there were 57,325,238 shares of common stock outstanding, held by approximately 60 stockholders[318] Dividend Policy - The company has not paid cash dividends and does not intend to in the foreseeable future, prioritizing earnings for business operations, debt repayment, and general corporate purposes[319] - Any future dividend payments will be at the discretion of the board and subject to factors like earnings, cash flows, capital requirements, and debt agreement restrictions[319][320] Securities Authorized for Issuance under Equity Compensation Plans - The Sun Country Airlines Holdings, Inc. 2021 Omnibus Incentive Plan authorizes 3,600,000 shares, with 3,276,169 remaining available as of December 31, 2022[321] Equity Compensation Plan Summary (as of Dec 31, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------------------------------------------ | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------ | | Sun Country Airlines Holdings, Inc. 2021 Omnibus Incentive Plan | 76,605 | $32.87 | 3,276,169 | | Sun Country Airlines 2018 Equity Incentive Plan | 4,458,450 | $6.08 | — | | Total | 4,535,055 | $6.53 | 3,276,169 | Purchases of Equity Security by the Issuer and Affiliated Purchasers - On October 31, 2022, the Board authorized a stock repurchase program for up to $50,000 of common stock[323] - During Q4 2022, the company entered a $25,000 accelerated share repurchase program, initially receiving 890,586 shares at $19.65/share[325] - By January 2023, a total of 1,371,518 shares were repurchased at an average price of $18.23/share[325] - As of December 31, 2022, $25,000 of Board authorization remained for repurchases[324][325] Stock Performance Graph Cumulative Total Return (March 17, 2021 = $100) | Index | 3/17/2021 | 3/31/2021 | 6/30/2021 | 9/30/2021 | 12/31/2021 | 3/31/2022 | 6/30/2022 | 9/30/2022 | 12/31/2022 | | :---------------------- | :-------- | :-------- | :-------- | :-------- | :--------- | :-------- | :-------- | :-------- | :--------- | | SNCY | $100.00 | $94.23 | $101.73 | $92.19 | $74.90 | $71.96 | $50.41 | $37.41 | $43.60 | | NYSE Arca Airline Index | $100.00 | $93.13 | $86.51 | $82.96 | $71.28 | $70.34 | $48.69 | $43.43 | $46.12 | | NASDAQ Composite Index | $100.00 | $97.94 | $107.24 | $106.83 | $115.67 | $105.14 | $81.54 | $78.19 | $77.39 | - The stock performance graph compares SNCY's cumulative total return against the NASDAQ Composite Index and the NYSE ARCA Airline Index from March 17, 2021, through December 31, 2022[327] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[329] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Sun Country Airlines' financial condition and results of operations for the years ended December 31, 2022 and 2021, with comparisons to 2020 incorporated by reference. It highlights the company's hybrid low-cost model, recovery from the COVID-19 pandemic, and operational challenges such as fuel price increases and staffing issues. The discussion covers operating revenues (scheduled, charter, ancillary, cargo, other), operating expenses (fuel, salaries, maintenance, etc.), non-operating items, and income taxes. It also includes key operating statistics, segment information, non-GAAP financial measures (Adjusted Operating Income, Adjusted Net Income, Adjusted EBITDA, Adjusted CASM), and an analysis of liquidity and capital resources, including debt, leases, and critical accounting policies Business Overview - Sun Country is a hybrid low-cost air carrier with synergistic scheduled service, charter, and cargo businesses, aiming for high growth, margins, and cash flows[331] - The scheduled service combines low costs with a high-quality product, generating higher TRASM than ULCCs and lower Adjusted CASM than LCCs[332] - The charter business provides diversification and downside protection with stable demand and pass-through fuel costs, serving casino operators, DoD, and sports teams[333] - The cargo business, primarily CMI service for Amazon, is asset-light and leverages existing operational expertise, contributing to profitability and growth[334] Operations in Review - The company aims to be a high-growth, low-cost carrier by attracting customers with low fares and a high-quality passenger experience (state-of-the-art interiors, free in-flight entertainment, seat reclining, seat-back power)[335] - Demand recovered in 2022 from the COVID-19 pandemic, impacting comparability with prior periods, but future demand remains uncertain[336][337] - Operational challenges in 2022 included training throughput issues, pilot staffing uncertainties, fuel price increases, and macroeconomic inflationary pressures[338] Operating Revenues - Operating revenues are categorized into Scheduled Service (base fares, expired credits), Charter Service (DoD, sports, casinos), Ancillary (baggage, seat fees, on-board sales), Cargo (Amazon ATSA), and Other (Sun Country Vacations, co-branded credit card, mail)[340][341][342] Operating Expenses - Operating expenses include Aircraft Fuel (volatile, includes mark-to-market gains/losses), Salaries, Wages, and Benefits (salaries, bonuses, equity comp, benefits), Aircraft Rent (monthly lease charges, maintenance reserves, lease return costs), Maintenance (parts, materials, third-party fees), Sales and Marketing (credit card fees, commissions, advertising), Depreciation and Amortization (fixed assets, finance leases, deferred maintenance), Ground Handling, Landing Fees and Airport Rent, Special Items (non-recurring), and Other Operating (travel, IT, insurance, legal)[343][344][345][346][347][348][349][350] Non-operating Income (Expense) - Non-operating items include Interest Income (cash, investments), Interest Expense (debt, finance leases), and Other, net (e.g., changes in TRA Liability)[351] Income Taxes - Income taxes are accounted for using the asset and liability method, recognizing deferred taxes based on differences between financial statement and tax bases of assets and liabilities[352] Prior Periods' Financial Statement Revisions - Previously issued financial statements were revised to correct an immaterial misstatement related to the application of ASC Topic 842, Leases, specifically regarding the capitalization of acquisition costs for purchased leased aircraft[353] Operating Statistics Key Operating Statistics (Year Ended December 31) | Metric | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Departures (Total System) | 43,686 | 38,317 | | Block hours (Total System) | 127,361 | 114,106 | | ASMs (thousands) (Total System) | 6,771,340 | 5,826,827 | | Revenue passengers carried (Scheduled Service) | 3,598,584 | 2,733,364 | | Load factor (Scheduled Service) | 83.5% | 74.7% | | Average base fare per passenger | $121.80 | $102.21 | | Ancillary revenue per passenger | $53.49 | $42.89 | | Charter revenue per block hour | $9,086 | $8,508 | | Fuel gallons consumed (thousands) | 71,690 | 60,739 | | Fuel cost per gallon, excluding derivatives | $3.75 | $2.19 | | Employees at end of period | 2,510 | 2,181 | | CASM (cents) | 12.39 | 8.77 | | Adjusted CASM (cents) | 7.04 | 6.48 | Results of Operations Consolidated Results of Operations (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Total Operating Revenues | $894,444 | $623,015 | $271,429 | 44% | | Total Operating Expenses | $838,736 | $511,068 | $327,668 | 64% | | Operating Income | $55,708 | $111,947 | $(56,239) | (50)% | | Total Non-operating Income (Expense), net | $(31,726) | $(11,617) | $(20,109) | 173% | | Income before Income Tax | $23,982 | $100,330 | $(76,348) | (76)% | | Income Tax Expense | $6,306 | $19,082 | $(12,776) | (67)% | | Net Income | $17,676 | $81,248 | $(63,572) | (78)% | - Total Operating Revenues increased 44% to $894.4 million in 2022, primarily due to continued recovery in passenger demand from the COVID-19 pandemic[360] - Scheduled service revenue increased 57% to $438.3 million, driven by a 32% increase in passengers, a 19% increase in average base fare, and an 8.8 percentage point increase in load factor[362] - Charter service revenue increased 27% to $161.6 million, driven by increased rates and a 19% increase in block hours due to recovery and new agreements[363] - Ancillary revenue increased 64% to $192.5 million, with average ancillary revenue per passenger up 25% to $53.49, also boosted by a new ancillary product reclassifying $30.4 million from scheduled service[364] - Cargo revenue slightly decreased by 1% to $90.4 million, despite a 3% increase in departures, due to shorter flights, heavy maintenance, and a one-time revenue benefit in 2021[365] - Aircraft Fuel expense increased 108% to $268.4 million, driven by a 71% increase in fuel cost per gallon and an 18% increase in gallons consumed[368] - Salaries, Wages, and Benefits increased 38% to $245.9 million, due to a new pilot collective bargaining agreement, increased per unit costs, and a 23% increase in average employee headcount[369] - Aircraft Rent decreased 50% to $8.8 million, as the fleet composition shifted from operating leases to owned aircraft or finance leases[370] - Maintenance expense increased 16% to $46.6 million, driven by increased departures, block hours, and contract labor costs[371] - Sales and Marketing increased 41% to $31.1 million, primarily due to higher credit card processing, GDS, and OTA fees from increased passenger revenue[372] - Depreciation and Amortization increased 19% to $67.6 million, reflecting the shift to more owned aircraft and finance leases[373] - Special Items, net, showed no expense in 2022 compared to a $72.4 million net benefit in 2021, which was primarily from CARES Act payroll support[376] - Interest Income increased significantly to $4.5 million in 2022 due to a change in investment strategy and purchase of debt securities[378] - Interest Expense increased 18% to $31.0 million, due to a larger mix of financed owned aircraft and finance leases[379] - Other, net, decreased by $19.9 million to a net expense of $5.2 million, mainly due to a $5.0 million adjustment to increase the TRA liability in 2022, compared to a $16.4 million decrease in 2021[380] Segment Information - The company has two operating and reportable segments: Passenger (Scheduled Service and Charter combined) and Cargo[382][666] Segment Operating Income (Year Ended December 31, in thousands) | Segment | 2022 Operating Income (Loss) | 2021 Operating Income | | :-------- | :--------------------------- | :-------------------- | | Passenger | $55,847 | $71,163 | | Cargo | $(139) | $40,784 | | Total | $55,708 | $111,947 | - Passenger operating income decreased by $15.3 million in 2022, primarily due to allocated CARES Act payroll support in 2021, increased aircraft fuel expense, and higher salaries/wages/benefits[382] - Cargo segment incurred an operating loss of $139 thousand in 2022, a decrease of $40.9 million from 2021, mainly due to allocated CARES Act support in 2021, a prior-period revenue benefit, increased pilot salaries, and decreased block hours[383] Non-GAAP Financial Measures - Non-GAAP measures like Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted Net Income, and Adjusted EBITDA are used to provide a meaningful comparison of results within the airline industry[385][386] Adjusted Operating Income Reconciliation (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | | Operating Income | $55,708 | $111,947 | | Special Items, net | — | $(72,419) | | Stock compensation expense | $2,774 | $5,562 | | TRA expenses | — | $320 | | Other Adjustments | — | $3,015 | | Adjusted Operating Income | $58,482 | $48,425 | | Operating Income Margin | 6.2% | 18.0% | | Adjusted Operating Income Margin | 6.5% | 7.8% | Adjusted Net Income Reconciliation (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Net Income | $17,676 | $81,248 | | Special Items, net | — | $(72,419) | | Stock compensation expense | $2,774 | $5,562 | | (Gain) Loss on asset transactions, net | $(318) | $3 | | Early pay-off of US Treasury loan | — | $842 | | Loss on refinancing credit facility | $1,557 | $382 | | Secondary Offering Costs | — | $1,763 | | TRA expenses | — | $320 | | TRA adjustment | $5,000 | $(16,400) | | Other Adjustments | — | $3,015 | | Income tax effect of adjusting items, net | $(923) | $13,922 | | Adjusted Net Income | $25,766 | $18,238 | Adjusted EBITDA Reconciliation (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Net Income | $17,676 | $81,248 | | Special Items, net | — | $(72,419) | | Stock Compensation expense | $2,774 | $5,562 | | (Gain) Loss on asset transactions, net | $(318) | $3 | | Secondary Offering Costs | — | $1,763 | | TRA expenses | — | $320 | | TRA adjustment | $5,000 | $(16,400) | | Interest Income | $(4,527) | $(85) | | Interest expense | $31,018 | $26,326 | | Provision for income taxes | $6,306 | $19,082 | | Depreciation and Amortization | $67,641 | $57,075 | | Other Adjustments | — | $3,015 | | Adjusted EBITDA | $125,570 | $105,490 | - Adjusted CASM excludes fuel costs, cargo operation costs, stock-based compensation, certain commissions, and special items to improve comparability and focus on controllable cost drivers[402][403][404] CASM to Adjusted CASM Reconciliation (Year Ended December 31, in cents per ASM) | Metric | 2022 (cents per ASM) | 2021 (cents per ASM) | | :------------------------------------ | :------------------- | :------------------- | | CASM | 12.39 | 8.77 | | Less: Aircraft Fuel | 3.96 | 2.22 | | Less: Stock Compensation expense | 0.04 | 0.10 | | Less: Special Items, net | — | (1.25) | | Less: TRA Expense | — | 0.01 | | Less: Cargo expenses, not already adjusted above | 1.33 | 1.15 | | Less: Sun Country Vacations | 0.02 | 0.01 | | Less: Other Adjustments | — | 0.05 | | Adjusted CASM | 7.04 | 6.48 | Liquidity and Capital Resources - Primary sources of liquidity as of December 31, 2022, included $92.1 million in cash and cash equivalents, $178.9 million in short-term investments, and $24.7 million available from the Revolving Credit Facility[411] - Primary uses of liquidity include operating expenses, capital expenditures (aircraft acquisition), lease rentals, maintenance reserve deposits, and debt repayments[412] - The company believes current liquidity and expected cash flows will be sufficient for the next twelve months, but external factors like fuel prices and economic conditions pose risks[413] - During 2022, seven incremental aircraft were acquired (five financed by 2022-1 EETC, two by finance leases), and two operating leases were reclassified to finance leases, and two operating leases were purchased[414][415] - Lessor Maintenance Deposits totaled $33.7 million as of December 31, 2022, held as collateral for lessors[417] - Investments include $172.6 million in highly liquid debt securities and $6.3 million in Certificates of Deposit as of December 31, 2022[418][419] - The company received $71.6 million in CARES Act grants in 2021; a $45.0 million CARES Act Loan was repaid in March 2021[419] - The Credit Agreement includes a $25.0 million Revolving Credit Facility (with $24.7 million available) and a $90.0 million Delayed Draw Term Loan Facility (DDTL), which was repaid and terminated in March 2022[422][423] - Debt financing includes 2019-1 EETC ($248.6 million face amount) and 2022-1 EETC ($188.3 million face amount) for aircraft financing[424][425] - The Tax Receivable Agreement (TRA) liability, estimated at $103.8 million as of December 31, 2022, requires payments to pre-IPO stockholders for 85% of realized tax savings from Pre-IPO Tax Attributes, with payments expected to start in 2023[299][427][428] Financial Condition and Liquidity Indicators (in thousands) | Metric | December 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------------ | :------------------ | | Cash and Cash Equivalents | $92,086 | $309,338 | | Available-for-Sale Securities | $172,635 | — | | Amount Available Under Revolving Credit Facility | $24,650 | $25,000 | | Total Liquidity | $289,371 | $334,338 | | Total Debt, net | $352,235 | $277,426 | | Finance Lease Obligations | $251,296 | $192,155 | | Operating Lease Obligations | $26,132 | $76,041 | | Total Debt and Lease Obligations | $629,663 | $545,622 | | Stockholders' Equity | $492,712 | $490,589 | | Total Invested Capital | $1,122,375 | $1,036,211 | | Debt-to-Capital | 0.56 | 0.53 | Sources and Uses of Liquidity (Year Ended December 31, in thousands) | Activity | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Total Operating Activities | $127,440 | $158,976 | $(31,536) | (20)% | | Total Investing Activities | $(349,330) | $(123,936) | $(225,394) | 182% | | Total Financing Activities | $7,033 | $212,382 | $(205,349) | (97)% | | Net (Decrease) Increase in Cash | $(214,857) | $247,422 | $(462,279) | (187)% | - Operating cash flow decreased by 20% in 2022, impacted by lower net income (due to 2021 CARES Act grants), increased fuel expense, and higher air traffic liabilities[433][434][435][436] - Capital expenditures increased 52% to $187.9 million in 2022, primarily for aircraft purchases, spare engines, and a flight simulator[438] - Financing activities in 2022 included $188.3 million from the 2022-1 EETC issuance and $25.1 million in common stock repurchases[440][444] - Off-balance sheet arrangements include indemnities in leases, pass-through trusts for EETC financings, and participation in fuel consortia[446][447][448] - Commitments include debt, aircraft leases, TRA payments, and future aircraft/engine purchases (e.g., three aircraft for 2023-2024, one engine for $4.5 million in Jan 2023)[450][451] Critical Accounting Policies and Estimates - Critical accounting policies involve significant judgment and assumptions, including Revenue Recognition, Loyalty Program Accounting, Asset Impairment Analysis, and Valuation of the Tax Receivable Agreement (TRA) Liability[454][455] - Revenue recognition for scheduled passenger service and most ancillary revenues occurs when the flight happens; unused non-refundable tickets are deferred as air traffic liability and recognized as revenue upon expiration or use of travel credit, with an estimate for breakage[456][457][458] - Loyalty program accounting defers revenue for points earned through travel purchases and co-branded credit card programs, recognizing it upon redemption, net of estimated breakage[461][462][463][465] - Asset impairment analysis reviews long-lived assets (Property & Equipment, Intangible Assets) for recoverability based on undiscounted cash flows and fair value, with no impairment losses recognized in 2020-2022[467][468][470] - Valuation of the TRA Liability involves estimating future tax savings from Pre-IPO Tax Attributes, with adjustments recorded in Other Non-Operating Income (Expense). The liability increased by $5.0 million in 2022 due to lower actual pre-tax income[471][472][473] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Sun Country Airlines is exposed to market risks primarily from aircraft fuel price volatility and interest rate fluctuations. While the company has historically used fuel derivative contracts, it had no hedges in place as of December 31, 2022, and no current plans to hedge, relying on pass-through provisions for charter and cargo. Interest rate risk primarily affects variable-rate debt under the Revolving Credit Facility and short-term investment securities, though the impact on liquidity is not anticipated to be material due to high liquidity and investment quality - The company is subject to commodity price risk (aircraft fuel) and interest rate risk[474] - Aircraft fuel prices are volatile; a one-cent per gallon increase in Q1 2023 is estimated to increase aircraft fuel expense by approximately $213 thousand (excluding reimbursed cargo fuel)[475] - The company had no fuel hedges in place as of December 31, 2022, and no current plans to hedge, as charter and cargo operations have pass-through fuel cost provisions[475] - Interest rate risk primarily relates to the $25.0 million Revolving Credit Facility; a 100 basis point increase in interest rates would increase annual interest expense by approximately $250 thousand if fully drawn[476] - Short-term investment securities (fixed-rate debt) with a fair value of $172.6 million as of December 31, 2022, are highly liquid, and fluctuations in their fair value are not anticipated to materially impact liquidity[477] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of Sun Country Airlines Holdings, Inc. for the years ended December 31, 2022, 2021, and 2020, prepared in conformity with U.S. GAAP. It includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity, and Cash Flows, along with comprehensive notes detailing company background, significant accounting policies (including revisions to prior statements), impact of COVID-19, revenue, earnings per share, aircraft, goodwill and intangible assets, debt, leases, stock-based compensation, 401(k) plan, fuel derivatives, investments, fair value measurements, income taxes, stockholders' equity, special items, commitments and contingencies, operating segments, parent company financial statements, and subsequent events Report of Independent Registered Public Accounting Firm (ID 185) - KPMG LLP, the independent registered public accounting firm, audited the consolidated financial statements for the three-year period ended December 31, 2022[481][484] - In their opinion, the consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[481] Consolidated Financial Statements Consolidated Balance Sheets (as of December 31, in thousands) | Asset/Liability/Equity | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Total Current Assets | $345,490 | $375,443 | | Total Property & Equipment, net | $785,667 | $578,518 | | Total Other Assets | $393,255 | $426,461 | | Total Assets | $1,524,412 | $1,380,422 | | Total Current Liabilities | $377,128 | $281,651 | | Total Long-term Liabilities | $654,572 | $608,182 | | Total Liabilities | $1,031,700 | $889,833 | | Total Stockholders' Equity | $492,712 | $490,589 | | Total Liabilities and Stockholders' Equity | $1,524,412 | $1,380,422 | Consolidated Statements of Operations (Year Ended December 31, in thousands) | Revenue/Expense/Income | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Total Operating Revenue | $894,444 | $623,015 | $401,486 | | Total Operating Expenses | $838,736 | $511,068 | $384,101 | | Operating Income | $55,708 | $111,947 | $17,385 | | Total Non-operating Income (Expense), net | $(31,726) | $(11,617) | $(22,067) | | Income (Loss) before Income Tax | $23,982 | $100,330 | $(4,682) | | Income Tax Expense (Benefit) | $6,306 | $19,082 | $(778) | | Net Income (Loss) | $17,676 | $81,248 | $(3,904) | | Basic Net Income (Loss) per share | $0.31 | $1.47 | $(0.08) | | Diluted Net Income (Loss) per share | $0.29 | $1.37 | $(0.08) | Consolidated Statements of Comprehensive Income (Loss) (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Net Income (Loss) | $17,676 | $81,248 | $(3,904) | | Other Comprehensive Loss | $(807) | — | — | | Comprehensive Income (Loss) | $16,869 | $81,248 | $(3,904) | Consolidated Statements of Cash Flows (Year Ended December 31, in thousands) | Activity | 2022 | 2021 | 2020 | | :--------------------