Dave Davis, CFO of Sun Country Airlines
The Wall Street Journal
By Kristin Broughton
May 19, 2021 8:00 am ET
Sun Country Airlines Holdings Inc. plans to spend a large chunk of the proceeds from its recent public listing on expanding its fleet, taking advantage of low prices and a glut of planes for sale amid the pandemic.
The Minneapolis-based discount airline, which offers vacation flights to warm-weather destinations such as California, Mexico and the Caribbean, raised about $235 million in an initial public offering in March. Founded in 1983, it was acquired three years ago by private-equity firm Apollo Global Management Inc., which still owns about 70% of shares following the IPO. Sun Country on Monday launched a secondary offering, which could decrease Apollo’s stake to around 60% if the transaction closes as planned, according to a spokeswoman.
Sun Country only buys used planes, a strategy that allows the company to expand at a low cost, said Dave Davis, the company’s chief financial officer. The airline currently owns 31 passenger planes and wants to increase that figure to about 50 by 2023. Sun Country has agreements in place to purchase three additional planes, according to the company.
Sale prices for used aircraft have declined over the past year as airlines sold planes due to Covid-19, Mr. Davis said. “It’s a good time for us to grow, because we can get a lot of aircraft at really, really attractive prices,” he said.
Sun Country plans to consider financing its aircraft purchases in addition to using proceeds from its IPO, it said.
A key reason for the drop in prices is the increase in supply as companies sell off older planes because of bankruptcy filings, accelerated aircraft retirement or fleet replacement, among other reasons, executives said.
Eighty airlines globally have filed for bankruptcy since February 2020, when the pandemic began in the U.S., according to Cirium, an airline information company owned by analytics firm Relx Group PLC.
Deliveries of new planes, including Boeing’s 737 MAX, are expected to further boost supply in the used market, said Hunter Keay, an equity analyst covering airlines at investment research firm Wolfe Research LLC. Regulators late last year cleared MAX jets for passenger flights again after grounding them for nearly two years following two deadly crashes.
Allegiant Travel Co., another budget airline, also primarily buys used planes. The Las Vegas-based company has 101 aircraft in its fleet consisting of Airbus A320 and A319 models. Some used planes are selling at a 30% discount compared with prices before the pandemic, Allegiant said on a recent earnings call. “We…hope to be opportunistic with fleet purchases given favorable pricing in the previously owned aircraft market,” a spokeswoman for the company said.
But there are trade-offs to buying used planes, including maintenance and fuel costs, which can be higher, according to Mr. Davis. The benefit of lower purchase prices, however, outweighs the additional costs, he said.
Sun Country also offers charter flights for college sports teams, casinos and the military. Additionally, it operates cargo flights for Amazon.com Inc. under an agreement signed in December 2019. Sun Country earned about $21.6 million from its cargo business during the first quarter. Under the agreement, Amazon leases the planes to Sun Country for a low cost, while the airline provides the staff, maintenance and insurance, Mr. Davis said.
Sun Country expects leisure travel to rebound in the months ahead as Covid-19 cases continue to decline. Revenue from scheduled passenger service—which accounts for about half of sales—fell 52% during the quarter ended March 31, to $54.6 million, compared with a year earlier.
Still, confirmed bookings for the summer months exceed 2019 levels, Mr. Davis said. After previous economic crises, including after 9/11 and the 2008 financial crisis, vacation flights to domestic locations bounced back before business trips or international travel did, he said.
“I think we’re seeing that even more strongly now, given the nature of Covid,” Mr. Davis said.
There have been several small airline upstarts buying these unwanted fire sale used aircraft recently, but I wonder if anyone has even looked into buying them for air cargo ops. It is clear that online shopping demand is here to stay and is only going to grow as the traditional brick & mortar shopper older generations (Boomers, Gen-X specifically) turn to more online shopping and younger generations continue to use as they grew up doing. The pandemic really set in motion the importance of air freight. Especially during the west coast port backlog of containers that have sat there for months from Asian ship deliveries due to labor shortages. Kalitta Air is the busiest it has ever been since it started operating 747s many years ago. That means there is business opportunities for competition moving in.
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