Last week Sun Country was sold by the Davis brothers to funds managed by private-equity-giant Apollo. Apollo isn’t in this just to be nice. It wants to make money. Now, I find myself trying to figure out just how that’s going to actually happen.
Sun Country has not done well in recent years, and it’s no surprise. But just a few months ago, the CEO was fired, and Jude Bricker (formerly with Allegiant) was brought in to turn the airline around. His plan, in short, was to go with a low-fare/high-fee structure and then become the spill carrier of choice. In other words, he wanted Sun Country to be nimble and go into markets with a lot of demand even if only for short periods of time.
In those markets, Sun Country could come in with a low price and take the passengers that the other airlines “spill” (don’t have room to serve). Think about flying to Hawai’i in the summer as an example. Fares are high, and seats are full. But in the off season, Sun Country would move its airplane elsewhere. This is a really challenging business model, and one that is fraught with peril, but it’s the model the airline chose.
When Apollo comes into a company like this, it’s because it sees opportunity. It sees a good deal that it can fix up in some way or another and then sell for a lot more money than it paid. The question is… what is that opportunity here?
Get Better Management
A common opportunity that private equity firms might see involves replacing an under-performing management team. But Apollo has said that it is keeping Jude in his position, so it apparently believes in the model that Jude is putting together. A management change does not seem to be an opportunity here, at least not now.
Synergy
Apollo owns a lot of companies, and many of them fall under the, as Apollo calls it, “Leisure” category. This could be an opportunity for Apollo to get two of its portfolio companies working together in order to boost both businesses. That seems most plausible on the surface, but the deeper I look, the more I doubt it.
There are really four of Apollo’s portfolio companies that could potentially have synergy here.
- Great Wolf Lodge: The indoor water park/hotel chain fills up almost entirely with people who are local or drive. There is very little air travel that’s tied specifically to a stay at Great Wolf, so it’s hard to imagine how this would really help.
- Diamond Resorts: This is a sleazy timeshare (I know, it’s redundant) company, but what it does is different than what Allegiant is trying to do with its resort down in Florida. Diamond really sells memberships where people have points they can use at many of their resorts all over the world. I don’t believe there’s any sort of vacation packaging here, nor do I know how that would even work with this kind of model other than just a general referral. I’m also not sure that there’s enough volume in any one particular market to really help Sun Country make different route planning decisions.
- Caesars: This includes Harrah’s so there is a substantial charter program that already exists to get people to resorts. Sun Country already participates by operating flights to get people to Harrah’s in Laughlin. In theory, the airline could potentially be given more of those charters, but Apollo only owns a third of Caesars. TPG has a third with another company owning 10 percent, and then the rest is public. Maybe if Sun Country wants to really focus on building a bigger charter program that it can offer at a lower price than other providers, then it could get more business. But it could do that without being owned by Apollo if that were the best path forward. I doubt the Apollo connection would be able to generate significantly more business.
- Norwegian/Oceania/Regent: This is possibly the most interesting, primarily Norwegian Cruise Line since the others are more upscale. But again, Apollo owns less than 20 percent, so they don’t have a controlling interest. Further, Norwegian already has a large air program with several partners, including American and United in the US. Sun Country could never serve all of Norwegian’s needs, so Norwegian needs to keep its existing partners happy. Could this relationship get Sun Country in the door? I guess, but again, I don’t see that as a huge value-driver.
Thinking about this on the whole, I just have trouble finding any really strong synergy opportunities here.
Cash
Perhaps the simplest explanation is the easiest one. The Davis brothers did not have more cash to put into the airline, so Sun Country had to make things work on its own. Apollo has cash, though when I asked whether it intended to give the airline a cash infusion as part of the deal, I received no response. It’s entirely possible that Apollo believes in the strategy, and it thinks the airline just needs some more money to really get things moving. It’s also possible that Jude has a better strategy but needed cash to make it happen, so Apollo buys into that new vision. (Though it’s unclear to me how Apollo would be uniquely capable of evaluating a proposed airline strategy since it doesn’t have experience in the space.)
The Price is Right
This ties with the previous point, but it deserves its own bullet. Since the Davis brothers couldn’t put money in, they may have opted to sell for cheap rather than losing everything. If the valuation is right, then Apollo may have just decided it was cheap enough to take a chance on. The terms haven’t been released, so we don’t know if this is true or not, but my guess is it’s a combination of this and the previous point that drove Apollo to act.
Private equity owners don’t tend to have a ton of patience. Sun Country is going to need to show that it can make things work with this new strategy quickly. Frontier was already making its low fare strategy work when Indigo Partners got it for a song. I’m sure Apollo would love the same outcome.
