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?
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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.
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.
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.
I’m also curious to see what Apollo/Bricker’s magic bullet might entail. While the ULCC model is relatively easy to get off the ground thanks to its simplicity, I have trouble coming up with that many high volume city pairs that existing ULCCs don’t already.
Even if they’re going for highly seasonal scheduling, Allegiant will likely already be there when it counts. Jude Bricker’s old colleagues are certainly continuing to expand.
This reads like an MBA strategy case response. Synergies: no. Strategy: maybe, but the buyer’s not especially qualified. Cash and opportunism: yup, these make sense.
I am a big fan of your blog, and look forward to informative and interesting posts on a regular basis. One of the things I most appreciate about your blog is transparency and a truthfulness that is usually backed by either facts or strong personal beliefs. In the interest of full disclosure, I will state that I am an employee of Diamond Resorts. Writing that “this is a sleazy timeshare company” truly takes away from the high journalistic standards that you hold yourself to, especially when your statement is not backed up by facts. Now I won’t say that the timeshare industry does not have its faults, but to disparage a company for no reason is far beneath the high standards you set for yourself. Keep up the tremendously good work that you so often do and try to avoid making unnecessary disparaging remarks.
Brian – Though I have a generally-negative feeling against all timeshares, I did do some research over the weekend about Diamond specifically and found plenty of articles pointing to questionable practices. Here’s one from last year, for example:
Maybe things have changed since then, so feel free to set the record straight.
Brett, yeah that article was a beauty. Listen, I can’t understand why anyone would buy a timeshare, especially in this day and age of Air BNB etc. But we have over a million members, many of whom seem to enjoy their benefits. Are there unhappy people, sure, but also remember it is far more likely to attract negative press and reviews versus positive ones. I’m still a huge fan of yours.
I worked in the timeshare industry for another company that had agreements with Diamond. They are pretty high up the scale of sleaze in an already problematic industry. Buying a timeshare, if used correctly, can have a decent value proposition. The biggest problem is that people get caught up in the sales pitch of “a lifetime of vacations” without taking a hard look at the costs beyond the initial purchase. Buyer beware, and educated.
There is a newly rebranded Great Wolf across the interstate from MSP, near Sun Country’s terminal and the Mall Of America. Maybe they can do a tie in with that property.
I think a lot of Minnesotans were rightly ticked off when Sun Country turned to the ULCC model. I don’t see their business growing much. I just booked a flight, MSP-TPA for mid february, and Sun Country’s fares were nearly the same as Delta. I ended up booking with points on WN. If they want to peel away business from DL at MSP, they need lower fares than DL.
That’s been my complaint against SY. If the fare is no cheaper than DL why wouldn’t I fly the “legacy” carrier. There I’ll get benefits from my status, have a whole lot more frequency and city pair options, a better on-board product with IFE, etc., etc. etc. The only positive of SY is avoiding ATL connections during a blackout – but seriously, if you’re now a ULCC you’d better price yourself that way. I still won’t fly you, but maybe you’ll siphon some of the tourists off the flights I’m on.
Was in Laughlin a couple of weeks ago. I believe Sun Country(737s) is the charter airline for Don Laughlin’s Riverside, not Harrahs/Caesar. I think Harrahs has been using Elite Airways (CRJs). They had been using Republic. Maybe Elite is doing the work for Republic.
Laughlin/Bullhead City for almost a year now has a single daily SkyWest/American Eagle RT flight from/to PHX. A couple of Wednesdays ago, I watched the IFP inbound load being 13, but this definitely is the slow/off-peak season–daily temps 55-60, winds of 25-30, gusts 50+. Certainly love visiting there, up to the early summer when temps get into the 115+ range.
Jay – Harrah’s uses Sun Country as one of its airlines. Look at the footer on this page: https://www.totalrewards.com/air/laughlin
That American flight is going away soon. I believe it was a revenue guarantee deal, and when it ended, American quit.
They do both the Riverside Casinos (they have for years) and Harrah’s/Caesars Charters into IFP. At one point they were also doing Tunica also. Took over Caesars for Republic in (IIRC) 2014.
American is a dead duck in Laughlin. Subsidized for a year, low loads, poor connection times, LAS 80 minutes away by car. Same issues with essential air everywhere.
Will you be addressing the meltdown at ATL/Hartsfield on Tue or Thu?
Nope. I thought about it, but there’s nothing to say. The airport lost power and Delta got hit hard. They’re doing their best to recover. Only criticism I have is that I wish they had an interline agreement with American again,but I’ve harped on that before.
I generally take the default attitude of “start shopping for a new job any time your company is sold/merged”, especially if it’s sold to a private equity firm or similar that has a < 10 year investment horizon. Given the lack of obvious synergies here, however, I'd say that this applies even more so in this case… Not sure that there is much left to give, but guessing there will be a huge focus on cost cutting/avoidance.
Does anyone see the similarity to Monarch? Purchased by an investment company who “couldn’t” or wouldn’t make it work. Monarch folds and IAG come in and buy the slots at Gatwick thereby eliminating the competition. Replace Monarch with Sun Country and Gatwick with Minneapolis and IAG with Delta who are always looking to reduce the competition