Ultra-low-cost carrier Sun Country Airlines (SNCY 0.27%) has been in a tailspin since its IPO in March 2021. However, the company now looks ready for takeoff, with strong revenue growth, a thriving charter business, and a successful, well-established partnership with Amazon.com (AMZN -0.47%).
A diversified business model
Sun Country was founded in 1982 at the Minneapolis-St Paul Airport, its current hub. However, it wasn't until CEO Jude Bricker joined the company in 2017 that Sun Country began to distinguish itself as a unique air carrier.
Bricker led sweeping changes for Sun Country, like cutting out premium cabins and free bags. More importantly, though, he hunted down additional sources of revenue for the company.
In a major gamechanger, the airline partnered with Amazon in 2019. The online retail giant took a stake in Sun Country in exchange for the airline's help shipping packages across the country. With Amazon providing the jets and Sun Country's pilots already familiar with Amazon's older fleet, the partnership was an instant success.
Besides carrying air cargo, another significant revenue source for Sun Country is its charter operations. The carrier offers charter services in over 300 airports across the country. In 2021, the company inked charter deals with both Caesar's Entertainment and Major League Soccer.
The cargo and charter categories have not only diversified Sun Country's business, but also provided supplemental revenues that, unlike passenger travel, are highly predictable revenue streams. Venturing into these new segments has helped Sun Country remain resilient -- and profitable.
It's going to be a bumpy ride
But the skies ahead aren't entirely blue for Sun Country. With demand still uncertain due to the pandemic, and other issues like crew shortages and increased operating costs, Sun Country will have to first weather the current storm.
Staffing issues present the most pressing challenge for Sun Country. A shortage of airline workers, including pilots, has caused major disruption in airline networks across the country. To attract talented pilots, Sun Country now offers significantly boosted pay rates, better benefits, and a better pilot bidding system.
However, higher pay for pilots means narrower profit margins amid a rise in operational costs across the board. Aviation fuel cost per gallon hit a record high this year, and Sun Country's fuel expenses were up 166% year over year for the first quarter.
In the passenger travel category, Sun Country's main competitors include Delta, Frontier, Spirit, Allegiant, JetBlue, and Southwest. Surrounded by these veteran rivals, Sun Country's management must remain diligent to keep the company airborne.
A pattern of profitability
Despite prevailing headwinds, the company seems undeterred, posting record high revenue for the first quarter of over $226 million. Earnings per share were also up year over year, at $0.20 vs -$0.09 in Q1 2021. This was also Sun Country's fourth consecutive profitable quarter, driven by strong bookings and cost control, according to CEO Jude Bricker.
Of the $226.5 million in revenue for Q1, 14.5% came from Sun Country's charter services and 9.3% was from its cargo services. In other words, the two services combined account for nearly a quarter of Sun Country's total revenues. With time, this steady and reliable ancillary revenue could lift the airline to cruising altitude.
To keep informed on the latest company financials, investors should take note of Sun Country's second-quarter earnings call on Aug. 9, 2022. The company expects passenger demand to have remained strong in the second quarter, buoyed by both cargo and charter business.
Although Sun Country's stock is down roughly 38% from its March 2021 opening price, its diversified business model has served it well. If Sun Country Airlines can continue on its growth trajectory, airline stock investors could see shares start regaining altitude in the near future.