Sun Country Plans More Boxes, Fewer People

Sun Country

Sun Country is tired of carrying you self-loading cargo around for prices that are too low, so now it’s pivoting toward more cargo flying. Amazon likes this plan, and investors should too. But if you happen to like flying from Minneapolis to, say, Indianapolis, this might be bad news for you.

In December 2019, Sun Country signed a deal to fly cargo around for Amazon using 12 Boeing 737-800 freighters. These airplanes were owned by Amazon but flown by Sun Country. The deal was for six years with two, two-year options.

During the pandemic, this was a godsend as the passenger business tanked. But since that time, well, it’s become a bad deal. Just take a look at these operating margins for the two sides of the business (excluding special items in 2020/2021).

The good news for Sun Country is that cargo has only been about 10 percent of total revenues. So while it has been losing some money, it’s not the overwhelming majority of operations.

You’d think these numbers would mean Sun Country would try to push further into the passenger market, but that’s not the case. So what’s going on?

First of all, revenues are starting to get a little softer. Q1 2023 saw an operating margin over 21 percent, so it’s falling off a bit. But Q1 is always the airline’s best quarter since that’s when Minnesotans in the airline’s MSP hub will pay ANYTHING to escape to somewhere that isn’t freezing. Q2 guidance, however, was affirmed to be coming in at the lower end of the previous range. So weakness is happening.

And as Sun Country continues to grow, it keeps stretching into thinner and thinner markets. This year, MSP has gained service on Sun Country to Albuquerque, Billings, Boise, Cleveland, Grand Rapids, Manchester (NH), Missoula, Monterey (CA), Oakland, and Syracuse among others. There is only so much you can grow from that market.

With this obvious problem facing the airline, it did the best thing it could think of… it went back to Amazon (or Amazon came to it, I suppose) to get a bigger and better deal.

Starting after next Q1’s peak, Sun Country will add 8 more 737s for a total of 20 under the Amazon banner. As usual, these airplanes will be owned by Amazon and operated by Sun Country, so it’s not a very capital-intensive project for the airline. And as the investor presentation states:

Revised economics reflect reality of higher post-covid cost environment

Steady state contribution margin of Amazon flying under the revised agreement now on par with historical passenger margins

That’s a big change in economics if we assume it means about a 20 point swing in margin for the Amazon business. Why would Amazon do this? Well, if you want to keep getting your stuff shipped quickly, Amazon has to pay more. It’s just the reality of a post-COVID world where things are more expensive.

Amazon really learned this the hard way when its deal with Atlas Air was recently terminated two years before it was to expire in 2026. Atlas had been flying 17 Boeing 767-300s and… wait for it… 8 Boeing 737s. It’s those 737s that I assume are moving over to Sun Country now. At this point, Sun Country will be the only narrowbody operator for Amazon in the US.

Next year, cargo flying will increase 61 to 63 percent for Sun Country. Since these are all airplanes owned by Amazon, I figured it didn’t have to impact the passenger business, but it will. Passenger capacity will be down 10 to 12 percent in 2025 before starting to grow again in 2026.

I asked Sun Country if these reductions were a strategic decision due to weakness or if it was necessary to help stand up the cargo growth. A spokesperson for the airline tells me it was both.

A strategic decision in that Amazon growth became an opportunity to seize now and provide the company with that steady flying, year round stability and improved economics.

In addition, we will need to allocate resources to bring those aircraft in, including Tech Ops (may hire staff in outstations included [Fort Worth], Lakeland, and Cincinnati). And we will need to continue hiring pilots and upgrading [first officers] to captains.

Overall, this looks like a great deal for Sun Country. It helps make the cargo work profitable while extending the agreement to 2030 (with options that go to 2037). Further, it allows the airline to pull back on passenger capacity when weakness is starting to creep in. Those thinner, weaker routes like Indianapolis are the ones that will likely suffer the most.

That being said, this doesn’t necessarily bode well for Sun Country’s long-term future as a growing passenger carrier. If MSP is tapped out, then what? Nothing else it has tried in recent times has worked. It will need to figure out a new plan eventually, but for now, it can bask in the glow of all those boxes.

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22 comments on “Sun Country Plans More Boxes, Fewer People

  1. For the vast majority of us who do not live in MSP, Sun Country is an airline that we rarely think of and have never (and will likely never) fly. Some of us (I don’t think I’m alone when I say this) can’t quite understand why/how Sun Country is still independent and still in business, given the seasonality of what is a relatively small niche.

    Peak “get the pasty (off-)white northerners out of pasty white snow and into pasty (off-)white sand” season is only a few months, after all. (Yes, I know that everyone living north of roughly the 40th parallel always says that, “There are two seasons in [local area]: winter and road construction.”) Focusing on leisure pax from one metro area (even a decent-sized and prosperous one) is still a narrow niche, especially when airlines (even those with cheaper, older planes) try to utilize their planes as much as possible to help spread out the fixed costs, and it’s a shame that there isn’t a better way to share or wet lease planes to/from another airline (even one on the other side of the globe) with opposite seasonality trends.

    I’m not trying to knock Sun Country at all (I’ve never flown them, but give them a ton of credit & respect for making the MSP leisure pax business work, and I know they have a loyal customer base), just pointing out that my kneejerk reaction as an outsider to hearing Sun Country referenced is inevitably, “Wow, I guess they are still around.”

  2. As a MSP based traveler, I avoid Sun Country as much as I can, but I fully appreciate and support what they do at MSP to keep Delta’s prices in check. We are already one of the highest, if not highest large airports in the US for average airfares, and it would be even higher if Ed ran 90% of the market out of here.

    1. A DL hub with little ULCC/LCC competition? SLC fares are atrocious, and I believe #2 on average in the country for this very reason. I would be curious what the market share of Sun Country is at MSP. I imagine DL is unfazed for the most part, but would like to know just how big they are these days. Like someone else mentioned, they are often “forgotten”, unless you’re up there.

    2. That’s how AirTran got out, southwest moved out of PHL, and many more examples of people appreciate&love the other airline only because it drops the preferred airline’s ticket price. And when the competitor is gone, people blame the competitor for leaving and not their preferred airline for charging sky high ticket price.

      1. Exactly.

        Amazon also benefits from having its transportation providers (for all modes, including not only air but also trucking) compete against each other. The guy dropping the package off at your porch may wear an Amazon branded vest and drive and Amazon branded van, but odds are very good that he works for an independent contractor who has a contract with Amazon; if that contractor’s delivery metrics aren’t good, Amazon will pull its volume from him and give it to someone else. Other delivery companies do the same thing.

        1. I was thinking in terms of Amazon basically extending it’s reach into more & more business sectors. Buying a house… Amazon, renting a car… Amazon, need healthcare… Amazon etc. Never said it was a smart idea, but when a mega corporation needs to continuously grow that is what happens even if through affiliates.

        2. I was thinking the very same. Amazon needs someone to fly those planes, so they are willing to pay SY. No matter how well SY performs, Amazon will be looking for anyone who can fly the planes for less. It’s no different from what we saw when we had multiple carriers scrapping for work. The majors owned the planes and could giveth or taketh, based on contract terms. SY’s legacy costs are going to go up, but their biggest customer is going to shrug and say (that’s your problem).

  3. As a part of trying to diversify our MSP winter flying, Sun Country had had a small but not totally insignificant summer operation in DFW for some time, flying to beach destinations like Cancun and Puerto Vallarta.

    At one time they had as many as six or seven departures on busy days. They also sold space directly through a vacation company (Apple Vacations I think but I could be wrong).

    They are still here this year but they are getting squeezed out as Frontier and Spirit fight to be the lead ULCC out of DFW.

    Would not surprise me to see them make bigger changes, or even merge with someone like Avelo. Avelo would make the most sense since they also fly 73’s. And unlike the other mergers I doubt the feds would bother to fight this one.

  4. At what point should an airline stop looking to growth beyond meeting incremental demand growth in markets it does well in? At some point the map fills up, and you’re fighting to turn a profit against four other carriers flying the same MCO route. What’s wrong with SY owning leisure MSP with some other day of week/seasonal leisure mixed in? Imagine how much better WN would be had they not taken on ATL and the Northeast, and focused instead on just dominating the South/Southwest?

    ULCCs were bragging about growing XX% annually pre-Pandemic, but that was built on raiding couch and drive consumers – the type of consumers fairing poorest in the current economy. What’s wrong with a low X% growth strategy more in line with natural EPAX demand growth? I imagine it’s that it drives the type of stock price growth investors could get from T-bonds, despite perhaps being a better long-term play.

    1. Apollo is still the largest owner of Sun Country shares even after taking it public. Blackrock is second. These are not companies that are willing to sit around and enjoy anemic growth. They want big returns.

  5. The over simplified answer here is that investors expect growth. Not just steady revenue and profit.

    When an investor buys the stock at say $20 a share, they buy it with an expectation of this amount of revenue and profit per year. For that share to become more valuable than $20, the company being invested in has to become larger. Make more money, make more profit, etc.

    Investors need the company to grow to make their shares worth more money.

  6. The Atlas Air move and impact of Shein/Temu is fascinating. It sounds like those two (with Amazon launching a clone soon) are chartering 747s to import billions of small-box shipments to dodge tariffs that only kick in above $800 in import box value. That’s great, until someone comes along and slams the door on that loophole (do we call it a loophole?).,and%20bottlenecks%2C%20industry%20experts%20said.

  7. Slightly off topic but we are taking Sun Country in a couple of days YVR – MSP. First time, but much cheaper than Delta. In our case, we live in Vancouver and the grandchildren are in Minneapolis. I would assume that Sun Country flies the route for Minneapolis folks who are taking an Alaska cruise. Delta flies twice a day but I would assume that 90% of that traffic is connecting on through the MSP hub. I don’t know that Sun Country offers a lot of connecting opportunity through MSP so it’s O & D traffic and there’s not enough of us old codgers to fill the planes.

  8. Running charters is another huge source of revenue for SY. They fly all of the MLS teams and frequently cancel revenue flying to fund charters.

  9. Won’t Sun Country have some extra passenger 737s sitting around now?

    What is it going to do with them? Mothball a few, or just have lower utilization?

    (Aren’t both of these expensive?)

    1. LRK – They haven’t said, but I’d assume it just means lower utilization.
      These are relatively cheap, previous-generation airplanes so I doubt it’s that costly to just lower utilization.

      1. In past years, they swap exess planes in their non busy season to Transavia and vice versa. It’s always funny to see a Transavia at MSP in February.

  10. The 2023 vs 2019 Chart (Y-axis = TRASM, X-axis = ASM) on page 4 of the Sun Country Investor Presentation that is linked in the article does a nice job visually summarizing the current Investor Angst and Activist Investor actions against Spirit, Frontier, Southwest, and JetBlue. While bottom-right corner is “horrific”, bottom-left corner is simply “bad”.

    It also shows the much better job done by the Big3, albeit I’m sure a prolific poster will jump in as it shows United performing better (y-axis = higher, x-axis = further to right) than both Delta and American.

    I know one metric or one chart is never The Total Scorecard, but again this chart nicely spaces our relative performance for 2023 vs 2019.

    As always, kudos to CF for this article and the insights in the comments too.

  11. Sun Country benefits in the long run from the Amazon deal as it spreads out fixed cost:
    – Charter work fills in some of ebb and flow of the seasonal passenger demand
    – Maintains proficiency with flight deck crews via a uniform fleet
    – MRO revenue from maintaining Amazon fleet
    – Further economy of scale if Sun Country picks up the eight airframes from Atlas
    – Picking up the slack as Amazon stepped away from Silver Airways when it dropped five ATR freighters

    Might be of some benefit if Sun Country established a focus city in a town with outragious ticket prices

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