SUN COUNTRY AIRLINES HOLDINGS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, the terms "Sun Country," "we," "us" and "our" refer
to
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. We believe our estimates and assumptions are reasonable; however, actual results could differ from those estimates. Our significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8, "Financial Statements" in the 2021 10-K. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments, or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria:
i.the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and
ii.different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations.
We have identified the following critical accounting policies:
-Revenue Recognition -Loyalty Program Accounting -Asset Impairment Analysis
-Valuation of the TRA Liability
Revenue Recognition
Scheduled passenger service, charter service, and most ancillary revenues are recognized when the passenger flight occurs. Revenues exclude amounts collected on behalf of other parties, including transportation taxes. The Company initially defers ticket sales as an air traffic liability and recognizes revenue when the passenger flight occurs. Unused non-refundable tickets expire at the date of scheduled travel and are recorded as revenue unless the customer notifies the Company in advance of such date that the customer will not travel. If notification is made, a travel credit is created for the face value, including ancillary fees, less applicable change fees. Revenue for change fees is deferred and recognized when the passenger travel is provided. Travel credits may generally be redeemed toward future travel for up to 12 months after the date of the original booking. As ofSeptember 30, 2022 , the Company's air traffic liability included$8,378 related to travel credits for future travel. The Company records an estimate for travel credits that will expire unused, otherwise known as breakage, in Passenger Revenue upon issuance of the travel credit. During the nine months endedSeptember 30, 2022 and 2021, the Company recorded$7,837 and$9,008 of estimated travel credit breakage, respectively. A portion of travel credits will expire unused, at which time any remaining revenue is recognized. -28-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) The estimated breakage rate is primarily based on historical experience of travel credit activity and other factors that may not be indicative of future trends, such as the COVID-19 pandemic, program changes or modifications that could affect the ultimate usage patterns of tickets and travel credits. The Company continuously monitors its breakage rate assumptions and may adjust its estimated breakage rate in the future. Changes in the Company's estimated breakage rate impact revenue recognition prospectively.
For the nine months ended
There are no critical accounting estimates associated with Charter or Cargo revenue recognition that would materially impact the amount of revenue recognized in any specific period.
Loyalty Program Accounting
The Sun Country Rewards program provides loyalty awards to program members based on accumulated loyalty points. The Company records a liability for loyalty points earned by passengers under the Sun Country Rewards program using two methods: (1) a liability for points that are earned by passengers on purchases of the Company's services is established by deferring revenue based on the redemption value, net of breakage; and (2) a liability for points attributed to loyalty points issued to the Company'sVisa card holders is established by deferring a portion of payments received from the Company's co-branded agreement. The Company's Sun Country Rewards program allows for the redemption of points to include payment towards air travel, land travel, taxes, and other ancillary purchases. The balance of the Loyalty Program Liabilities fluctuates based on seasonal patterns, which impacts the volume of loyalty points awarded through travel or issued to co-branded credit card and other partners (deferral of revenue) and loyalty points redeemed (recognition of revenue). The Company records an estimate for loyalty points breakage in Passenger Revenue upon issuance of the loyalty points. Loyalty points held by co-branded credit card members do not expire. All other loyalty points expire if unused after three years. Points Earned Through Travel Purchases. Passenger sales that earn Sun Country Rewards provide customers with travel services and loyalty points, which are each considered distinct performance obligations. The Company values each performance obligation on a standalone basis. The Company determines the standalone selling price of loyalty points issued using a redemption value approach, which considers the value a passenger will receive upon redemption of the loyalty points. Consideration allocated to loyalty points is deferred, net of estimated breakage, and recognized as Passenger Revenue when both the loyalty points have been redeemed and the passenger travel occurs. Points Earned through the Co-Branded Credit Card Program. Under the Company's co-branded credit card program, funds received for the marketing of a co-branded credit card and delivery of loyalty points are accounted for as a multiple-deliverable arrangement. The Company determined that the arrangement has two distinct performance obligations: (1) loyalty points to be awarded; and, (2) use of our brand and access to our customer lists, and certain other advertising and marketing elements (collectively, the marketing performance obligation). Funds received from the co-branded credit card program are allocated to the two performance obligations based on relative standalone selling price. The assumptions used to allocate the funds received are not considered critical to the application of the accounting model for the Company's loyalty program. Consideration allocated to loyalty points is deferred and recognized as Passenger Revenue when both the loyalty points have been redeemed and the passenger travel occurs. Consideration allocated to the marketing performance obligation is recognized as revenue as the spend occurs and is recorded in Other Revenue. The Company estimates breakage for loyalty points that are not likely to be redeemed. Loyalty points are combined in one homogenous pool, that includes both air and non-air travel awards, and are not separately identifiable. The estimated breakage rate is primarily based on historical experience of loyalty point redemption -29-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) activity and other factors that may not be indicative of future trends, such as the COVID-19 pandemic, program changes or modifications that could affect the ultimate usage pattern of loyalty points. The Company continuously monitors its breakage rate assumptions and may adjust its estimated breakage rate for loyalty points in the future. Changes in the Company's estimated breakage rate assumptions impact revenue recognition prospectively. During the nine months endedSeptember 30, 2022 , the Company recognized$1,134 of loyalty points breakage within Passenger Revenue. A 10% change in the Company's loyalty point estimated breakage rate would have resulted in a change to Passenger Revenue of approximately$141 .
Asset Impairment Analysis
The Company's long-lived assets, such as Property & Equipment and finite-lived Intangible Assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's assets include aircraft and associated engines, operating and finance lease assets, the Company's customer relationship finite-lived intangible assets, and other long-lived assets. The Company reviews the current economic and operating environment to determine whether events or circumstances indicate that these assets may be impaired. Such indicators include, but are not limited to: (1) significant, permanent decrease in the market price of the Company's long-lived assets, (2) significant decrease in the projected cash flows generated from the use of its long-lived assets, (3) changes in the estimated useful life or productive capacity of the asset, (4) changes in the regulatory environment in which the Company operates, and (5) a decision to permanently remove flight equipment or other long-lived assets from operations. If such factors are identified and the Company determines that the carrying amount of the long-lived asset (or asset group) is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the asset (or asset group's) carrying amount exceeds its fair value. Fair value is determined using various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. When the Company assesses its long-lived assets for impairment, it utilizes certain assumptions, including, but not limited to: (1) estimated fair value of the assets and (2) estimated future undiscounted cash flows expected to be generated by those assets. Cash flow estimates are determined based on additional assumptions, including asset utilization, average fares, projected fuel costs and other operating costs, along with the estimated service life of the asset. Certain of these assumptions are highly volatile and could change significantly from period to period due to various macroeconomic and industry-specific events. To determine whether impairment exists, the Company groups its assets based on the lowest level of identifiable cash flows, which is its operating segments. This is due to the Company operating a Passenger Service fleet comprised exclusively of one type of aircraft, the Boeing 737-NG. None of the Company's long-lived assets are owned by, or associated with, the Cargo operating segment. The Company has not recorded an impairment on its long-lived assets for any of the periods presented in these Condensed Consolidated Financial Statements, nor did it identify any triggering events during the nine months endedSeptember 30, 2022 and for the year endedDecember 31, 2021 .
Valuation of the TRA Liability
In connection with its IPO, the Company entered into a TRA with pre-IPO stockholders (the "TRA holders"). The TRA provides for the payment by the Company to the TRA holders of 85% of the amount of cash savings, if any, inU.S. federal, state, local, and foreign income tax that the Company actually realizes (or are deemed to realize in certain circumstances) as a result of certain tax attributes that existed at the time of the IPO (the "Pre-IPO Tax Attributes"). Amounts payable under the TRA are contingent upon, among other things, (i) generation of future -30-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) taxable income over the term of the TRA, (ii) the Company's participation in future government programs, (iii) stock option activity during periods prior to the commencement of payments under the TRA and (iv) future changes in tax laws. These factors could result in an increase or decrease in the related liability, which would be recognized in the Company's earnings in the period of such change. If the Company does not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then it would not be required to make the related TRA payments. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, the Company considers its historical results and incorporates certain assumptions, including revenue growth, operating margin, stock option exercises and tax depreciation expense. The TRA liability estimates related to the generation of future taxable income and stock option activity during the periods prior to the commencement of payments only applies through fiscal year 2022, due to the expiration of the CARES Act dividend and capital distribution restrictions in 2022. A$10,000 change in forecasted taxable income would have resulted in a change to the TRA Liability of approximately$1,200 . Stock option exercises during the nine months endedSeptember 30, 2022 did not significantly impact the TRA liability. Adjustments to the TRA are recorded in the current period in Other, net within Non-operating Income (Expense) on the Company's Condensed Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
See Note 2 to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently adopted accounting pronouncements.
Forward-Looking Statements
The following discussion and analysis presents factors that had a material effect on our results of operations during the nine months endedSeptember 30, 2022 and 2021. Also discussed is our financial position as ofSeptember 30, 2022 andDecember 31, 2021 . This section should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements and related notes and discussion under the heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 10-K. This discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions and forecasts. Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors, including those set forth under the section of this report titled, "Risk Factors" and elsewhere in this report. You should carefully read the " Risk Factors " included in our 2021 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Business Overview
Sun Country is a new breed of hybrid low-cost air carrier that dynamically
deploys shared resources across our synergistic scheduled service, charter, and
cargo businesses. By doing so, we believe we are able to generate high growth,
high margins and strong cash flows with greater resilience than other passenger
airlines. We focus on serving leisure and visiting friends and relatives ("VFR")
passengers and charter customers as well as providing crew, maintenance and
insurance ("CMI") services to Amazon, with flights throughout the United States
and to destinations in Canada , Mexico , Central America and the Caribbean . Based
in Minnesota , we operate an agile network that includes our scheduled service
business, our synergistic charter, and cargo businesses. We share resources,
such as flight crews, across our scheduled service, charter, and cargo business
lines with the objective of generating higher returns and margins and mitigating
the seasonality of our
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) route network. We optimize capacity allocation by market, time of year, day of week, and line of business by shifting flying to markets during periods of peak demand and away from markets during periods of low demand with far greater frequency than nearly all other largeU.S. passenger airlines. We believe our flexible business model generates higher returns and margins while also providing greater resiliency to economic and industry downturns than a traditional scheduled service carrier. Our scheduled service business combines low costs with a high-quality product to generate higher Total Revenue per Available Seat Mile ("TRASM") than Ultra Low-Cost Carriers ("ULCCs") while maintaining lower Adjusted Cost per Available Seat Mile ("CASM") than Low Cost Carriers ("LCCs"), resulting in best-in-class unit profitability. Our business includes many cost characteristics of ULCCs (which includes Allegiant Travel Company,Frontier Airlines and Spirit Airlines), such as an unbundled product (which means we offer a base fare and allow customers to purchase ancillary products and services for an additional fee), point-to-point service and a single-family fleet of Boeing 737-NG aircraft, which allow us to maintain a cost base comparable to these ULCCs. However, we offer a high-quality product that we believe is superior to ULCCs and consistent with that of LCCs (which includes Southwest Airlines and JetBlue Airways). For example, our product includes more legroom than ULCCs, complimentary beverages, in-flight entertainment, and in-seat power, none of which are offered by ULCCs. Our charter business, which is one of the largest narrow body charter operations inthe United States , is a key component of our strategy because it provides both inherent diversification and downside protection because it is synergistic with our other businesses. Our charter business has several favorable characteristics, including: large repeat customers, more stable demand than scheduled service flying, and the ability to pass through certain costs, including fuel. Our diverse charter customer base includes casino operators, theU.S. Department of Defense , college, and professional sports teams. Our charter business includes ad hoc, repeat, short-term and long-term service contracts with pass through fuel arrangements and annual rate escalations. Most of our business is non-cyclical because theU.S. Department of Defense and sports teams continue to fly during normal economic downturns and our casino contracts are long-term in nature. OnDecember 13, 2019 , we signed the ATSA with Amazon to provide air cargo services. We are currently flying 12 Boeing 737-800 cargo aircraft for Amazon. Our CMI service is asset-light from a Sun Country perspective as Amazon supplies the aircraft and covers many of the operating expenses, including fuel, and provides all cargo loading and unloading services. We are responsible for flying the aircraft under our air carrier certificate, crew, aircraft line maintenance and insurance, all of which allow us to leverage our existing operational expertise from our scheduled service and charter businesses. Our cargo business also enables us to leverage certain assets, capabilities, and fixed costs to enhance profitability and promote growth across our Company.
Operations in Review
We believe a key component of our success is establishing Sun Country as a high growth, low-cost carrier inthe United States by attracting customers with low fares and garnering repeat business by delivering a high-quality passenger experience, offering state-of-the-art interiors, free streaming of in-flight entertainment to passenger devices, seat reclining and seat-back power in all of our aircraft. The COVID-19 pandemic resulted in a dramatic decline in passenger demand across theU.S. airline industry. We experienced a significant decrease in demand related to the COVID-19 pandemic, which caused a material decline in our 2021 results as compared to pre-pandemic levels, and negatively impacted our financial condition and operating results. During the third quarter of 2022, we have continued to see recovery in demand from the COVID-19 pandemic relative to demand in 2021, which may impact the comparability of results presented. However, the ongoing impact of the COVID-19 pandemic on overall demand for air travel remains uncertain and cannot be predicted -32-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) at this time. In addition, the impact of COVID-19 vaccine mandates, uncertainties in pilot staffing, higher aircraft fuel prices due to global geopolitical events, and the impact of macroeconomic conditions including inflationary pressures could impact our business and results of operations in the near term. While the COVID-19 pandemic-induced industry downturn delayed our growth in 2020 and 2021, we believe that our investments have positioned us to profitably grow our business in the long term following a rebound in theU.S. airline industry. Operational challenges, driven by training throughput issues, fuel price increases and other inflationary pressures have impacted the Company, as well as the industry. In the near term, current airline travel demand will partially offset the additional costs associated with operational challenges, fuel price increases, and other inflationary pressures. Our flexible business model gives us the ability to adjust our services in response to these market conditions, which is targeted at producing the highest possible returns for Sun Country. For more information on our business and strategic advantages, see the "Business" and "Management's Discussion and Analysis of Operations" sections within Part I, Item 1 and Part II, Item 7 , respectively, in our 2021 10-K. Components of Operations For a more detailed discussion on the nature of transactions included in the separate line items of our Condensed Consolidated Statement of Operations, see "Management's Discussion and Analysis of Operations" in Part II, Item 7 in our 2021 10-K.
Prior Periods' Financial Statement Revisions
As described in Note 2 to the Condensed Consolidated Financial Statements,
we have revised previously issued financial statements to correct an immaterial
misstatement. Accordingly, all prior period numbers included in this
Management's Discussion and Analysis of Financial Condition reflect the effect
of the revisions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Operating Statistics
Three Months Ended September 30, 2022 (1) Three
Months Ended
Scheduled Scheduled
Service Charter Cargo Total Service Charter Cargo Total
Departures (2) 5,611 2,359 3,043 11,072 5,533 1,798 2,912 10,299
Block hours (2) 16,947 4,623 8,739 30,492 17,313 3,835 8,533 29,842
Aircraft miles (2) 6,777,764 1,629,061 3,399,149 11,864,450 7,046,575 1,423,300 3,376,084 11,897,035
Available seat miles (ASMs)
(thousands) (2) 1,256,755 286,189 1,553,483 1,296,555 244,393 1,549,432
Total revenue per ASM (TRASM)
(cents) 12.34 14.99 12.75 8.90 13.83 9.63
Average passenger aircraft during
the period (3) 36.8 32.9
Passenger aircraft at end of
period (3) 42 35
Cargo aircraft at end of period 12 12
Average daily aircraft
utilization (hours) (3) 6.4 7.0
Average stage length (miles) 1,055 1,155
Revenue passengers carried (4) 908,967 785,348
Revenue passenger miles (RPMs)
(thousands) (4) 1,101,011 1,011,936
Load factor (4) 87.6 % 78.0 %
Average base fare per passenger
(4) $ 112.44 $ 102.14
Ancillary revenue per passenger
(4) $ 55.29 $ 42.91
Charter revenue per block hour
(4) $ 9,280 $ 8,816
Fuel gallons consumed (thousands) (2) 13,352 3,056 16,509 13,475 2,760 16,321 Fuel cost per gallon, excluding derivatives and other items$ 3.93 $ 2.24 Employees at end of period 2,354 2,014 Cost per available seat mile (CASM) (cents) (5) 13.28 9.83 Adjusted CASM (cents) (6) 7.55 6.39 ______________________ (1)Certain operating statistics and metrics are not presented as they are not calculable or are not utilized by management. (2)Total System operating statistics for Departures, Block hours, Aircraft miles, ASMs and Fuel gallons consumed include amounts related to flights operated for maintenance; therefore the Total System amounts are higher than the sum of Scheduled Service, Charter Service and Cargo amounts. (3)Scheduled Service and Charter service utilize the same fleet of aircraft. Aircraft counts and utilization metrics are shown on a system basis only. (4)Passenger-related statistics and metrics are shown only for scheduled service. Charter service revenue is driven by flight statistics. (5)CASM is a key airline cost metric. CASM is defined as operating expenses divided by total available seat miles. (6)Adjusted CASM is a non-GAAP measure derived from CASM by excluding fuel costs, costs related to our cargo operations, special items, and certain other costs that are unrelated to our airline operations. -34-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended September 30, 2022 (1) Nine
Months Ended
Scheduled Scheduled
Service Charter Cargo Total Service Charter Cargo Total
Departures (2) 17,512 6,214 8,310 32,246 14,777 5,036 8,229 28,196
Block hours (2) 57,585 13,000 23,891 95,052 48,420 10,822 24,973 84,648
Aircraft miles (2) 23,112,200 4,630,257 9,209,477 37,113,673 19,758,087 4,005,794 9,884,576 33,780,294
Available seat miles (ASMs)
(thousands) (2) 4,284,403 800,698 5,114,134 3,653,335 693,837 4,368,972
Total revenue per ASM (TRASM)
(cents) 11.27 14.80 11.76 8.04 12.76 8.75
Average passenger aircraft during
the period (3) 35.2 31.7
Passenger aircraft at end of
period (3) 42 35
Cargo aircraft at end of period 12 12
Average daily aircraft
utilization (hours) (3) 7.4 6.9
Average stage length (miles) 1,169 1,199
Revenue passengers carried (4) 2,715,707 2,038,399
Revenue passenger miles (RPMs)
(thousands) (4) 3,565,501 2,705,969
Load factor (4) 83.2 % 74.1 %
Average base fare per passenger
(4) $ 123.24 $ 99.05
Ancillary revenue per passenger
(4) $ 51.39 $ 42.50
Charter revenue per block hour
(4) $ 9,118 $ 8,179
Fuel gallons consumed (thousands)
(2) 44,940 9,085 54,322 37,299 7,739 45,269
Fuel cost per gallon, excluding
derivatives and other items $ 3.81 $ 2.08
Employees at end of period 2,354 2,014
Cost per available seat mile
(CASM) (cents) (5) 12.25 7.98
Adjusted CASM (cents) (6) 6.91 6.32
____________________
(1)Certain operating statistics and metrics are not presented as they are not
calculable or are not utilized by management.
(2)Total System operating statistics for Departures, Block hours, Aircraft
miles, ASMs and Fuel gallons consumed include amounts related to flights
operated for maintenance; therefore the Total System amounts are higher than the
sum of Scheduled Service, Charter Service and Cargo amounts.
(3)Scheduled Service and Charter service utilize the same fleet of aircraft.
Aircraft counts and utilization metrics are shown on a system basis only.
(4)Passenger-related statistics and metrics are shown only for scheduled
service. Charter service revenue is driven by flight statistics.
(5)CASM is a key airline cost metric. CASM is defined as operating expenses
divided by total available seat miles.
(6)Adjusted CASM is a non-GAAP measure derived from CASM by excluding fuel
costs, costs related to our cargo operations, special items, and certain other
costs that are unrelated to our airline operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Results of Operations For the Three Months EndedSeptember 30, 2022 and 2021 Three Months Ended September 30, $ % 2022 2021 Change Change Operating Revenues: Scheduled Service$ 102,200 $ 80,212 $ 21,988 27 % Charter Service 42,899 33,809 9,090 27 % Ancillary 50,261 33,697 16,564 49 % Passenger 195,360 147,718 47,642 32 % Cargo 23,687 24,400 (713) (3) % Other 2,653 1,545 1,108 72 % Total Operating Revenues 221,700 173,663 48,037 28 % Operating Expenses: Aircraft Fuel 64,843 36,647 28,196 77 % Salaries, Wages, and Benefits 58,661 43,424 15,237 35 % Aircraft Rent 1,949 3,925 (1,976) (50) % Maintenance 11,018 9,660 1,358 14 % Sales and Marketing 6,827 5,470 1,357 25 % Depreciation and Amortization 17,181 14,710 2,471 17 % Ground Handling 8,669 7,873 796 10 % Landing Fees and Airport Rent 12,926 12,069 857 7 % Special Items, net - (65) 65 (100) % Other Operating, net 24,235 18,629 5,606 30 % Total Operating Expenses 206,309 152,342 53,967 35 % Operating Income 15,391 21,321 (5,930) (28) % Non-operating Income (Expense): Interest Income 1,610 28 1,582 NM Interest Expense (7,493) (6,286) (1,207) 19 % Other, net 3,422 456 2,966 NM Total Non-operating Expense, net (2,461) (5,802) 3,341 (58) % Income Before Income Tax 12,930 15,519 (2,589) (17) % Income Tax Expense 2,253 2,140 113 5 % Net Income$ 10,677 $ 13,379 $ (2,702) (20) %
"NM" stands for not meaningful
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Total Operating Revenues increased$48,037 , or 28%, to$221,700 for the three months endedSeptember 30, 2022 from$173,663 for the three months endedSeptember 30, 2021 . The increase was largely driven by an increase in demand for passenger service during 2022 as compared to 2021, which was significantly impacted by a decrease in passenger demand due to the COVID-19 pandemic. Scheduled Service. Scheduled service revenue increased by$21,988 , or 27%, to$102,200 for the three months endedSeptember 30, 2022 from$80,212 for the three months endedSeptember 30, 2021 . The table below presents select operating data for scheduled service, expressed as quarter-over-quarter changes: Three Months Ended September 30, % 2022 2021 Change Change Departures 5,611 5,533 78 1 % Passengers 908,967 785,348 123,619 16 % Average base fare per passenger$ 112.44 $ 102.14 $ 10.30 10 % RPMs (thousands) 1,101,011 1,011,936 89,075 9 % ASMs (thousands) 1,256,755 1,296,555 (39,800) (3) % TRASM (cents) 12.34 8.90 3.44 39 % Passenger load factor 87.6 % 78.0 % 9.6 pts N/A The quarter-over-quarter increases in certain scheduled service operating data were primarily the result of the continued recovery in demand from the COVID-19 pandemic in the third quarter of 2022 relative to the same period in 2021. The quarter-over-quarter increase in demand is demonstrated by a 39% increase in TRASM, a 10% increase in the average base fare per passenger, and a 16% increase in passengers, even as quarter-over-quarter departures were materially consistent and ASMs decreased by 3%. The year-over-year revenue increase is slightly offset by the introduction of a new Ancillary product, which reclassified approximately$11,600 of revenue from Scheduled Service to Ancillary. Charter Service. Charter service revenue increased$9,090 , or 27%, to$42,899 for the three months endedSeptember 30, 2022 , from$33,809 for the three months endedSeptember 30, 2021 . Charter revenue per block hour was$9,280 for the three months endedSeptember 30, 2022 , as compared to$8,816 for the three months endedSeptember 30, 2021 , for an increase of 5%. The increase in Charter service revenue was driven by the increase in rates and a 21% increase in Charter block hours due to the continued recovery from the COVID-19 pandemic and new charter agreements that began operations during 2022. Rates in 2021 suffered from significant competitive pressure because other carriers had excess aircraft, crew, and resources to operate charter capacity. Ancillary. Ancillary revenue increased by$16,564 , or 49%, to$50,261 for the three months endedSeptember 30, 2022 , from$33,697 for the three months endedSeptember 30, 2021 . The 16% increase in scheduled passengers during the period resulted in greater sales of air travel-related services, such as: baggage fees, seat selection and upgrade fees, and on-board sales. Ancillary revenue for the three months endedSeptember 30, 2022 was further benefited by the introduction of a new a new ancillary product that began in the second quarter of 2022 and reclassified approximately$11,600 of revenue from Scheduled Service to Ancillary. Ancillary revenue was$55.29 per passenger in the three months endedSeptember 30, 2022 , up$12.38 , or 29%, from the three months endedSeptember 30, 2021 . Revenue per passenger increased due to the inclusion of a new ancillary product that reclassified portions of revenue from Scheduled Service to Ancillary, the return of onboard food and beverage sales, and increased demand. Cargo. Revenue from cargo services decreased by$713 , or 3%, to$23,687 for the three months endedSeptember 30, 2022 , from$24,400 for the three months endedSeptember 30, 2021 . The decrease was -37-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
primarily driven by an approximately
Other. Other revenue was$2,653 for the three months endedSeptember 30, 2022 , as compared to$1,545 for the three months endedSeptember 30, 2021 . The increase was primarily driven by increased revenue fromSun Country Vacations as a result of higher year-over-year bookings.
Operating Expenses
Aircraft Fuel. We believe Aircraft Fuel expense, excluding derivatives and other
items, is the best measure of the effect of fuel prices on our business as it
consists solely of items associated with fuel for our operations and is
consistent with how management analyzes our operating performance. This measure
is defined as GAAP Aircraft Fuel expense, excluding gains related to fuel hedge
derivative contracts and certain costs that are recognized within Aircraft Fuel
expense, but are not directly related to our Fuel Cost per Gallon.
The primary components of Aircraft Fuel expense are shown in the following
table:
Three Months Ended September 30, %
2022 2021 Change Change
Total Aircraft Fuel Expense $ 64,843 $ 36,647 $ 28,196 77 %
Exclude: Fuel Derivative Losses - (72) 72 (100) %
Other Excluded Items 71 (5) 76 NM
Aircraft Fuel Expense, Excluding
Derivatives and Other Items $ 64,914 $ 36,570 $ 28,344 78 %
Fuel Gallons Consumed (thousands) 16,509 16,321 188 1 %
Fuel Cost per Gallon, Excluding
Derivatives and Other Items $ 3.93 $ 2.24 $ 1.69 75 %
"NM" stands for not meaningful
The increase in Aircraft Fuel expense was mainly driven by the 75% year-over-year increase in the average price per gallon of fuel due to current market conditions, further exacerbated by global geopolitical events.
Salaries, Wages, and Benefits. Salaries, Wages, and Benefits expense increased$15,237 , or 35%, to$58,661 for the three months endedSeptember 30, 2022 , as compared to$43,424 for the three months endedSeptember 30, 2021 . The increase was primarily driven by the new Collective Bargaining Agreement ("CBA") for our pilots, which went into effect in the first quarter of 2022, increased per unit costs, and an increase in Passenger Service block hours. The employee headcount as ofSeptember 30, 2022 was 2,354, as compared to 2,014 as ofSeptember 30, 2021 , for an increase of 340, or 17%. The increase in employee headcount was driven by increased passenger demand as we continue our recovery from the impacts of the COVID-19 pandemic. Aircraft Rent. Aircraft Rent expense decreased$1,976 , or 50%, to$1,949 for the three months endedSeptember 30, 2022 , as compared to$3,925 for the three months endedSeptember 30, 2021 . Aircraft Rent expense decreased primarily due to the composition of our aircraft fleet shifting from aircraft under operating leases (expense is recorded within Aircraft Rent) to owned aircraft or finance leases (expense is recorded through Depreciation and Amortization and Interest Expense). Specifically, in the nine months endedSeptember 30, 2022 , we executed lease amendments which modified two aircraft from operating leases to finance leases -38-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
and purchased two aircraft previously classified as operating leases. As of
Maintenance. Maintenance materials and repair expense increased$1,358 , or 14%, to$11,018 for the three months endedSeptember 30, 2022 , as compared to$9,660 for the three months endedSeptember 30, 2021 . The increase in maintenance expense was primarily driven by increased line maintenance for the Cargo fleet, increased per unit costs due to incremental contract labor spend, and an increase in certain aircraft acquisition expenses that are not eligible for capitalization. Sales and Marketing. Sales and Marketing expense increased$1,357 , or 25%, to$6,827 for the three months endedSeptember 30, 2022 , as compared to$5,470 for the three months endedSeptember 30, 2021 . The quarter-over-quarter increase was driven by a$1,300 increase in credit card processing and global distribution system fees due to volume and rate increases. Depreciation and Amortization. Depreciation and Amortization expense increased$2,471 , or 17%, to$17,181 for the three months endedSeptember 30, 2022 , as compared to$14,710 for the three months endedSeptember 30, 2021 . The increase was primarily due to the impact of a change in the composition of our aircraft fleet that results in an increased number of owned aircraft and aircraft under finance leases (the expense is recorded as Depreciation and Amortization and Interest Expense). As ofSeptember 30, 2022 and 2021, there were 29 and 21 owned aircraft and 11 and eight finance leases, respectively. Ground Handling. Ground Handling expense increased$796 , or 10%, to$8,669 for the three months endedSeptember 30, 2022 , as compared to$7,873 for the three months endedSeptember 30, 2021 . The increase was primarily due to new charter agreements that began operations during 2022. Landing Fees and Airport Rent. Landing Fees and Airport Rent increased$857 , or 7%, to$12,926 for the three months endedSeptember 30, 2022 , as compared to$12,069 for the three months endedSeptember 30, 2021 . The increase was primarily due to new charter agreements that began operations during 2022 and an increase in rates.
Special Items, net. There were no Special Items recorded for the three months
ended
Note 12 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report.
Other Operating, net. Other operating, net increased$5,606 , or 30%, to$24,235 for the three months endedSeptember 30, 2022 , as compared to$18,629 for the three months endedSeptember 30, 2021 , mainly due to increased departures within the Passenger segment, which resulted in higher crew and other employee travel costs, catering expenses, and other operational overhead costs, as well as an increase in rates associated with these expenditures.
Non-operating Income (Expense)
Interest Income. Interest income was$1,610 for the three months endedSeptember 30, 2022 primarily due to the change in investment strategy which led to the purchase of debt securities during 2022. Interest income for the three months endedSeptember 30, 2021 was nominal. Interest Expense. Interest expense increased$1,207 , or 19%, to$7,493 for the three months endedSeptember 30, 2022 , as compared to$6,286 for the three months endedSeptember 30, 2021 . The increase was primarily due to a larger mix of owned aircraft that were financed or refinanced with the proceeds from the 2022-1 EETC, as well as an increase in aircraft accounted for as finance leases during the three months ended -39-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)September 30, 2022 . These amounts were slightly offset by$1,049 of capitalized interest. For more information on the Company's Debt, see Note 7 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Other, net. Other, net increased by$2,966 to a net benefit of$3,422 for the three months endedSeptember 30, 2022 , as compared to net benefit of$456 for the three months endedSeptember 30, 2021 . The increase was primarily due to the$3,500 adjustment to decrease the estimated TRA liability in the current quarter, as compared to the$1,100 adjustment to decrease the estimated TRA liability in the prior year. For more information on the TRA liability, see
Note 11 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report.
Income Tax. The Company's effective tax rate for the three months ended
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Results of Operations For the Nine Months EndedSeptember 30, 2022 and 2021 Nine Months Ended September 30, $ % 2022 2021 Change Change Operating Revenues: Scheduled Service$ 334,679 $ 201,905 $ 132,774 66 % Charter Service 118,526 88,511 30,015 34 % Ancillary 139,548 86,626 52,922 61 % Passenger 592,753 377,042 215,711 57 % Cargo 65,930 68,084 (2,154) (3) % Other 8,607 5,338 3,269 61 % Total Operating Revenues 667,290 450,464 216,826 48 % Operating Expenses: Aircraft Fuel 206,334 90,631 115,703 128 % Salaries, Wages, and Benefits 178,576 129,815 48,761 38 % Aircraft Rent 7,347 13,339 (5,992) (45) % Maintenance 35,794 30,170 5,624 19 % Sales and Marketing 23,336 16,402 6,934 42 % Depreciation and Amortization 49,364 41,532 7,832 19 % Ground Handling 24,838 19,654 5,184 26 % Landing Fees and Airport Rent 32,708 29,606 3,102 10 % Special Items, net - (72,419) 72,419 (100) % Other Operating, net 68,401 50,026 18,375 37 % Total Operating Expenses 626,698 348,756 277,942 80 % Operating Income 40,592 101,708 (61,116) (60) % Non-operating Income (Expense): Interest Income 2,166 52 2,114 NM Interest Expense (23,097) (19,487) (3,610) 19 % Other, net (5,156) 18,505 (23,661) NM Total Non-operating Expense, net (26,087) (930) (25,157) NM Income Before Income Tax 14,505 100,778 (86,273) (86) % Income Tax Expense 4,113 18,444 (14,331) (78) % Net Income $ 10,392$ 82,334 $ (71,942) (87) %
"NM" stands for not meaningful
Total Operating Revenues increased by
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) increase in demand for passenger service during the nine months endedSeptember 30, 2022 as compared to 2021, which was significantly impacted by a decrease in passenger demand due to the COVID-19 pandemic. Scheduled Service. Scheduled service revenue increased by$132,774 , or 66%, to$334,679 for the nine months endedSeptember 30, 2022 from$201,905 for the nine months endedSeptember 30, 2021 . The table below presents select operating data for scheduled service: Nine Months Ended September 30, % 2022 2021 Change Change Departures 17,512 14,777 2,735 19 % Passengers 2,715,707 2,038,399 677,308 33 % Average base fare per passenger$ 123.24 $ 99.05 $ 24.19 24 % RPMs (thousands) 3,565,501 2,705,969 859,532 32 % ASMs (thousands) 4,284,403 3,653,335 631,068 17 % TRASM (cents) 11.27 8.04 3.23 40 % Passenger load factor 83.2 % 74.1 % 9.1 pts N/A The significant year-over-year increases in all scheduled service operating data was primarily the result of the continued recovery in demand from the COVID-19 pandemic in the nine months endedSeptember 30, 2022 relative to the same period in 2021. The year-over-year increase in demand is demonstrated by a 40% increase in TRASM, 19% increase in departures, a 33% increase in passengers, and a 24% increase in the average base fare per passenger. The year-over-year revenue increase is slightly offset by the introduction of a new Ancillary product, which reclassified approximately$17,200 of revenue from Scheduled Service to Ancillary. Charter Service. Charter service revenue increased$30,015 , or 34%, to$118,526 for the nine months endedSeptember 30, 2022 , from$88,511 for the nine months endedSeptember 30, 2021 . Charter revenue per block hour was$9,118 for the nine months endedSeptember 30, 2022 , as compared to$8,179 for the nine months endedSeptember 30, 2021 , for an increase of 11%. The increase in Charter service revenue was driven by the increase in rates and a 20% increase in Charter block hours due to the continued recovery from the COVID-19 pandemic and new charter agreements that began operations during 2022. Rates in 2021 suffered from significant competitive pressure because other carriers had excess aircraft, crew, and resources to operate charter capacity. Ancillary. Ancillary revenue increased by$52,922 , or 61%, to$139,548 for the nine months endedSeptember 30, 2022 , from$86,626 for the nine months endedSeptember 30, 2021 . The 33% increase in scheduled passengers during the period resulted in greater sales of air travel-related services, such as: baggage fees, seat selection and upgrade fees, and on-board sales. Ancillary revenue for the nine months endedSeptember 30, 2022 was further benefited by the introduction of a new a new ancillary product that began in the second quarter of 2022 and reclassified approximately$17,200 of revenue from Scheduled Service to Ancillary. Ancillary revenue was$51.39 per passenger in the nine months endedSeptember 30, 2022 , up$8.89 , or 21%, from the nine months endedSeptember 30, 2021 . Revenue per passenger increased due to the inclusion of a new ancillary product that reclassified portions of revenue from Scheduled Service to Ancillary, the return of onboard food and beverage sales, and increased demand. Cargo. Revenue from cargo services decreased by$2,154 , or 3%, to$65,930 for the nine months endedSeptember 30, 2022 , from$68,084 for the nine months endedSeptember 30, 2021 . The number of departures was materially consistent year-over-year; however, block hours declined 4%. The year-over-year decrease in block hours was primarily driven by heavy maintenance events. Operational factors and an approximately$1,700 revenue benefit recognized in 2021 also contributed to the year-over-year revenue decrease. -42-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Other. Other revenue was$8,607 for the nine months endedSeptember 30, 2022 , as compared to$5,338 for the nine months endedSeptember 30, 2021 . The increase was primarily driven by an increase in revenue fromSun Country Vacations as a result of higher year-over-year bookings.
Operating Expenses
Aircraft Fuel. We believe Aircraft Fuel expense, excluding derivatives and other
items, is the best measure of the effect of fuel prices on our business as it
consists solely of items associated with fuel for our operations and is
consistent with how management analyzes our operating performance. This measure
is defined as GAAP Aircraft Fuel expense, excluding gains related to fuel hedge
derivative contracts and certain costs that are recognized within Aircraft Fuel
expense, but are not directly related to our Fuel Cost per Gallon.
The primary components of Aircraft Fuel expense are shown in the following
table:
Nine Months Ended September 30, %
2022 2021 Change Change
Total Aircraft Fuel Expense $ 206,334 $ 90,631 $ 115,703 128 %
Exclude: Fuel Derivative Gains - 3,527 (3,527) (100) %
Other Excluded Items 598 64 534 NM
Aircraft Fuel Expense, Excluding
Derivatives and Other Items $ 206,932 $ 94,222 $ 112,710 120 %
Fuel Gallons Consumed (thousands) 54,322 45,269 9,053 20 %
Fuel Cost per Gallon, Excluding
Derivatives and Other Items $ 3.81 $ 2.08 $ 1.73 83 %
The increase in Aircraft Fuel expense was mainly driven by the 83% increase in
the average price per gallon of fuel, and a 20% increase in fuel gallons
consumed resulting from a recovery in demand as demonstrated by a 19% increase
in passenger service block hours.
Salaries, Wages, and Benefits. Salaries, Wages, and Benefits expense increased
$48,761 , or 38%, to $178,576 for the nine months ended September 30, 2022 , as
compared to $129,815 for the nine months ended September 30, 2021 . The increase
was driven by the new Collective Bargaining Agreement ("CBA") for our pilots,
which went into effect in the first quarter of 2022, increased per unit costs,
and an increase in Passenger Service block hours. The employee headcount as of
September 30, 2022 was 2,354, as compared to 2,014 as of September 30, 2021 , for
an increase of 340, or 17%. The increase in employee headcount was to support
all lines of business during the ongoing recovery from the impacts of the
COVID-19 pandemic.
Aircraft Rent. Aircraft Rent expense decreased $5,992 , or 45%, to $7,347 for the
nine months ended September 30, 2022 , as compared to $13,339 for the nine months
ended September 30, 2021 . Aircraft Rent expense decreased primarily due to the
composition of our aircraft fleet shifting from aircraft under operating leases
(expense is recorded within Aircraft Rent) to owned aircraft or finance leases
(expense is recorded through Depreciation and Amortization and Interest
Expense). Specifically, in the first nine months of 2022, we executed lease
amendments which modified two aircraft from operating leases to finance leases
and purchased two aircraft previously classified as operating leases. For the
nine months ended September 30, 2022 and 2021, there were an average of four and
eight aircraft under operating leases, respectively.
Maintenance. Maintenance materials and repair expense increased $5,624 , or 19%,
to $35,794 for the nine months ended September 30, 2022 , as compared to $30,170
for the nine months ended September 30, 2021 . The increase in maintenance
expense was primarily driven by increased departures and block hours across the
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Passenger segment, an increase in maintenance events for the Cargo fleet, and increased per unit costs due to incremental contract labor spend.
Sales and Marketing. Sales and Marketing expense increased$6,934 , or 42%, to$23,336 for the nine months endedSeptember 30, 2022 , as compared to$16,402 for the nine months endedSeptember 30, 2021 . Passenger revenue increased 57% between these two periods leading to a nearly$6,500 in increased credit card processing and global distribution system fees during this time period. Depreciation and Amortization. Depreciation and Amortization expense increased$7,832 , or 19%, to$49,364 for the nine months endedSeptember 30, 2022 , as compared to$41,532 for the nine months endedSeptember 30, 2021 . The increase was primarily due to the impact of a change in the composition of our aircraft fleet to an increased number of owned aircraft and aircraft under finance leases (the expense is recorded as Depreciation and Amortization and Interest Expense). For the nine months endedSeptember 30, 2022 and 2021, there was an average of 25 and 19 owned aircraft and 11 and six finance leases, respectively. Ground Handling. Ground Handling expense increased$5,184 , or 26%, to$24,838 for the nine months endedSeptember 30, 2022 , as compared to$19,654 for the nine months endedSeptember 30, 2021 . The increase was primarily driven by the 20% increase in Passenger segment departures due to the result of the continued recovery in demand from the COVID-19 pandemic and new charter agreements that began operations during 2022. Landing Fees and Airport Rent. Landing Fees and Airport Rent increased$3,102 , or 10%, to$32,708 for the nine months endedSeptember 30, 2022 , as compared to$29,606 for the nine months endedSeptember 30, 2021 . The increase was primarily driven by the 20% increase in Passenger segment departures due to the result of the continued recovery in demand from the COVID-19 pandemic and new charter agreements that began operations during 2022. Special Items, net. There were no Special Items recorded during the nine months endedSeptember 30, 2022 . Special Items had a net benefit of$72,419 for the nine months endedSeptember 30, 2021 . The net benefit was primarily driven by the payroll support received under the CARES Act, of which the Cargo segment was allocated$18,401 . These credits within the Cargo segment results were based on the respective segment salaries, wages, and benefits. For more information on Special Items, see Note 12 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Other Operating, net. Other operating, net increased$18,375 , or 37%, to$68,401 for the nine months endedSeptember 30, 2022 , as compared to$50,026 for the nine months endedSeptember 30, 2021 , mainly due to increased departures within the Passenger segment, which resulted in higher crew and other employee travel costs, catering expenses, and other operational overhead costs.
Non-operating Income (Expense)
Interest Income. Interest income was$2,166 for the nine months endedSeptember 30, 2022 primarily due to the change in investment strategy which led to the purchase of debt securities during 2022. Interest income for the nine months endedSeptember 30, 2021 was nominal. Interest Expense. Interest expense increased$3,610 , or 19%, to$23,097 for the nine months endedSeptember 30, 2022 , as compared to$19,487 for the nine months endedSeptember 30, 2021 . The increase was primarily due to a larger mix of owned aircraft that were financed or refinanced with the proceeds from the 2022-1 EETC, as well as an increase in aircraft accounted for as finance leases during the nine months endedSeptember 30, 2022 . These amounts were slightly offset by$2,327 of capitalized interest. For more information -44-
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on the Company's Debt, see Note 7 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report.
Other, net. Other, net decreased$23,661 to a net expense of$5,156 for the nine months endedSeptember 30, 2022 , as compared to net benefit$18,505 for the nine months endedSeptember 30, 2021 . The decrease was primarily due to the$5,000 adjustment to increase the estimated TRA liability as ofSeptember 30, 2022 , as compared to the$19,800 adjustment to decrease the estimated TRA liability as ofSeptember 30, 2021 . For more information on the TRA liability, see Note 11 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Income Tax. The Company's effective tax rate for the nine months endedSeptember 30, 2021 was 28.4% compared to 18.3% for the nine months endedSeptember 30, 2021 . The increase in the effective tax rate was primarily due to the non-taxable adjustment of the TRA liability, partially offset by stock compensation benefits. -45-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Segments
For the Three Months Ended
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Passenger Cargo Total Passenger Cargo Total
Operating Revenues $ 198,013 $ 23,687 $ 221,700 $ 149,263 $ 24,400 $ 173,663
Operating Expenses:
Aircraft Fuel 64,763 80 64,843 36,556 91 36,647
Salaries, Wages, and
Benefits 44,051 14,610 58,661 33,619 9,805 43,424
Aircraft Rent 1,949 - 1,949 3,925 - 3,925
Maintenance 7,290 3,728 11,018 7,175 2,485 9,660
Sales and Marketing 6,827 - 6,827 5,470 - 5,470
Depreciation and
Amortization 17,152 29 17,181 14,684 26 14,710
Ground Handling 8,666 3 8,669 7,873 - 7,873
Landing Fees and Airport
Rent 12,823 103 12,926 11,949 120 12,069
Special Items, net - - - (65) - (65)
Other Operating, net 19,030 5,205 24,235 15,265 3,364 18,629
Total Operating Expenses 182,551 23,758 206,309 136,451 15,891 152,342
Operating Income (Loss)
Adjustment for Special Items, net - - - (65) - (65)
Operating Income (Loss),
Excluding Special Items, net
Operating Margin %, Excluding Special Items, net 8% -% 7% 9% 35% 12% Passenger. Passenger Operating Income increased by$2,650 to$15,462 for the three months endedSeptember 30, 2022 from$12,812 for the three months endedSeptember 30, 2021 . The increase in Passenger Operating Income was driven by an expansion in demand for passenger service during 2022 as compared to 2021, which was significantly impacted by the COVID-19 pandemic. Operating Margin Percentage for the three months endedSeptember 30, 2022 decreased by 1%, as compared to the three months endedSeptember 30, 2021 . The Operating Margin Percentage decrease was primarily driven by the quarter-over-quarter increase in Aircraft Fuel Expense, slightly offset by increases in revenue across all Passenger segment business lines. For -46-
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more information on the changes in the components of Operating Income for the Passenger segment, refer to the Results of Operations discussion above.
Cargo. Cargo Operating Income decreased by$8,580 , resulting in an Operating Loss of$71 for the three months endedSeptember 30, 2022 , as compared to Operating Income of$8,509 for the three months endedSeptember 30, 2021 . Operating Margin Percentage decreased by 35%, to break-even, over the same periods. The decrease was primarily driven by a quarter-over-quarter increase in Salaries, Wages, and Benefits driven by the new CBA for our pilots that went into effect in the beginning of 2022, a quarter-over-quarter increase in Maintenance Expense for the Cargo fleet due to an increase in maintenance events and per unit costs, and a revenue benefit recognized in the prior period. For more information on the components of Operating Income for the Cargo segment, refer to the Results of Operations discussion above, where we describe the cargo expenses embedded within each financial statement line item. -47-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Segments
For the Nine Months Ended
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Passenger Cargo Total Passenger Cargo Total
Operating Revenues $ 601,360 $ 65,930 $ 667,290 $ 382,380 $ 68,084 $ 450,464
Operating Expenses:
Aircraft Fuel 206,254 80 206,334 90,468 163 90,631
Salaries, Wages, and
Benefits 138,436 40,140 178,576 98,615 31,200 129,815
Aircraft Rent 7,347 - 7,347 13,339 - 13,339
Maintenance 25,665 10,129 35,794 22,417 7,753 30,170
Sales and Marketing 23,336 - 23,336 16,402 - 16,402
Depreciation and
Amortization 49,282 82 49,364 41,453 79 41,532
Ground Handling 24,828 10 24,838 19,654 - 19,654
Landing Fees and Airport
Rent 32,386 322 32,708 29,228 378 29,606
Special Items, net - - - (54,018) (18,401) (72,419)
Other Operating, net 54,614 13,787 68,401 39,164 10,862 50,026
Total Operating Expenses 562,148 64,550 626,698 316,722 32,034 348,756
Operating Income $ 39,212 $ 1,380 $ 40,592 $ 65,658 $ 36,050 $ 101,708
Adjustment for Special
Items, net - - - (54,018) (18,401) (72,419)
Operating Income,
Excluding Special Items,
net $ 39,212 $ 1,380 $
40,592
Operating Margin %, Excluding Special Items, net 7% 2% 6% 3% 26% 7% Passenger. Passenger Operating Income decreased by$26,446 to$39,212 for the nine months endedSeptember 30, 2022 from$65,658 for the nine months endedSeptember 30, 2021 . Operating Margin Percentage, Excluding Special Items, net increased by 4%, to 7%, from 3% over the same periods. The year-over-year decrease in Passenger Operating Income is primarily driven by the allocated payroll support received under the CARES Act during the first half of 2021, recognized within Special Items, net, as well as the increase in Aircraft Fuel Expense and Salaries, Wages, and Benefits. The increase in Operating Margin Percentage, Excluding Special Items, net was primarily driven by the year-over-year increases in revenue across all Passenger segment business lines, slightly offset by the increases in Aircraft Fuel Expense and Salaries, -48-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Wages, and Benefits. For more information on the changes in the components of Operating Income for the Passenger segment, refer to the Results of Operations discussion above. Cargo. Cargo Operating Income decreased by$34,670 to$1,380 for the nine months endedSeptember 30, 2022 , as compared to$36,050 for the nine months endedSeptember 30, 2021 . Operating Margin Percentage, Excluding Special Items, net decreased by 24%, to 2%, over the same periods. The decrease in Operating Income was primarily driven by the allocated payroll support received under the CARES Act during the first half of 2021, recognized within Special Items, net, a revenue benefit recognized in the prior period, a year-over-year increase in Salaries, Wages, and Benefits driven by the new CBA for our pilots that went into effect in the beginning of 2022, decreased block hours and departures driven by heavy maintenance events, and operational factors that reduced revenue. The year-over-year decrease in Operating Margin Percentage, Excluding Special Items, net is driven by the factors listed above, excluding the benefit recognized as a result of the allocated payroll support received under the CARES Act during the first half of 2021. For more information on the components of Operating Income for the Cargo segment, refer to the Results of Operations discussion above, where we describe the cargo expenses embedded within each financial statement line item.
Non-GAAP Financial Measures
We sometimes use information that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in the airline industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP. Further, our non-GAAP information may be different from the non-GAAP information provided by other companies. We believe certain charges included in our operating expenses on a GAAP basis make it difficult to compare our current period results to prior periods as well as future periods and guidance. The tables below show a reconciliation of non-GAAP financial measures used in this report to the most directly comparable GAAP financial measures.
Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted Net Income and Adjusted EBITDA
Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted Net
Income, and Adjusted EBITDA are non-GAAP measures included as supplemental
disclosure because we believe they are useful indicators of our operating
performance. Derivations of Operating Income and net income are well recognized
performance measurements in the airline industry that are frequently used by our
management, as well as by investors, securities analysts and other interested
parties in comparing the operating performance of companies in our industry.
Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted Net
Income, and Adjusted EBITDA have limitations as analytical tools. Some of the
limitations applicable to these measures include: Adjusted Operating Income,
Adjusted Operating Income Margin, Adjusted Net Income, and Adjusted EBITDA do
not reflect the impact of certain cash and non-cash charges resulting from
matters we consider not to be indicative of our ongoing operations; and other
companies in our industry may calculate Adjusted Operating Income, Adjusted
Operating Income Margin, Adjusted Net Income, and Adjusted EBITDA differently
than we do, limiting each measure's usefulness as a comparative measure. Because
of these limitations, the following non-GAAP measures should not be considered
in isolation or as a substitute for performance measures calculated in
accordance with GAAP and may not be the same as or comparable to similarly
titled measures presented by other companies due to the possible differences in
the method of calculation and in the items being adjusted.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
For the foregoing reasons, Adjusted Operating Income, Adjusted Operating Income
Margin, Adjusted Net Income and Adjusted EBITDA have significant limitations
which affect their use as indicators of our profitability. Accordingly, readers
are cautioned not to place undue reliance on this information.
The following table presents the reconciliation of Operating Income to Adjusted
Operating Income, and Adjusted Operating Income Margin for the periods presented
below.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Adjusted Operating Income Margin
Reconciliation:
Operating Revenue $ 221,700 $ 173,663 $ 667,290 $ 450,464
Operating Income 15,391 21,321 40,592 101,708
Special Items, net (a) - (65) - (72,419)
Stock compensation expense 487 964 1,981 4,577
TRA expenses (b) - 25 - 340
Adjusted Operating Income $ 15,878 $ 22,245 $ 42,573 $ 34,206
Operating Income Margin 6.9 % 12.3 % 6.1 % 22.6 %
Adjusted Operating Income Margin 7.2 % 12.8 % 6.4 % 7.6 %
_________________________
(a) The adjustments include Special Items, net, as presented in Note 12 of the
Company's Condensed Consolidated Financial Statements.
(b) This represents the one-time costs to establish the TRA liability with our TRA
holders. See Note 11 of the Company's Condensed Consolidated Financial
Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
The following table presents the reconciliation of Net Income to Adjusted Net Income for the periods presented below.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Adjusted Net Income Reconciliation:
Net Income $ 10,677 $ 13,379 $ 10,392 $ 82,334
Special Items, net (a) - (65) - (72,419)
Stock Compensation Expense 487 964 1,981 4,577
(Gain) Loss on Asset Transactions, net (239) 2 (318) 2
Early pay-off of US Treasury loan - - - 842
Loss on refinancing credit facility - - 1,557 382
Secondary Offering Costs - 641 - 1,281
TRA expenses (b) - 25 - 340
TRA adjustment (c) (3,500) (1,100) 5,000 (19,800)
Income tax effect of adjusting items,
net (d) (57) (360) (741) 14,949
Adjusted Net Income $ 7,368 $ 13,486 $ 17,871 $ 12,488 _________________________
(a) The adjustments include Special Items, net, as presented in Note 12 of the
Company's Condensed Consolidated Financial Statements. (b) This represents the one-time costs to establish the TRA liability with our TRA
holders. See Note 11 of the Company's Condensed Consolidated Financial
Statements.
(c) This represents the adjustment to the TRA for the period, which is recorded in
Non-Operating Income (Expense). (d) The tax effect of adjusting items, net is calculated at the Company's statutory rate
for the applicable period. The TRA adjustment is not included within the income tax
effect calculation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
The following table presents the reconciliation of Net Income to Adjusted EBITDA for the periods presented below.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Adjusted EBITDA Reconciliation:
Net Income $ 10,677 $
13,379 $ 10,392
- (65) - (72,419)
Stock Compensation Expense 487 964 1,981 4,577
(Gain) Loss on Asset Transactions, net (239) 2 (318) 2
Secondary Offering Costs - 641 - 1,281
TRA expenses (b) - 25 - 340
TRA adjustment (c) (3,500) (1,100) 5,000 (19,800)
Interest Income (1,610) (28) (2,166) (52)
Interest Expense 7,493 6,286 23,097 19,487
Provision for Income Taxes 2,253 2,140 4,113 18,444
Depreciation and Amortization 17,181 14,710 49,364 41,532
Adjusted EBITDA $ 32,742 $ 36,954 $ 91,463 $ 75,726 _________________________
(a) The adjustments include Special Items, net, as presented in Note 12 of the
Company's Condensed Consolidated Financial Statements. (b) This represents the one-time costs to establish the TRA liability with our TRA
holders. See Note 11 of the Company's Condensed Consolidated Financial Statements. (c) This represents the adjustment to the TRA for the period, which is recorded in
Non-Operating Income (Expense).
CASM and Adjusted CASM
Cost per Available Seat Mile ("CASM") is a key airline cost metric defined as
operating expenses divided by total available seat miles. Adjusted CASM is a
non-GAAP measure derived from CASM by excluding fuel costs, costs related to our
cargo operations, certain commissions and other costs of selling our vacation
products from this measure as these costs are unrelated to our airline
operations and improve comparability to our peers. Adjusted CASM is an important
measure used by management and by our Board of Directors in assessing quarterly
and annual cost performance. Adjusted CASM is commonly used by industry analysts
and we believe it is an important metric by which they compare our airline to
others in the industry, although other airlines may exclude certain other costs
in their calculation of Adjusted CASM. The measure is also the subject of
frequent questions from investors.
Adjusted CASM excludes fuel costs. By excluding volatile fuel expenses that are
outside of our control from our unit metrics, we believe that we have better
visibility into the results of operations and our non-fuel cost initiatives. Our
industry is highly competitive and is characterized by high fixed costs, so even
a small reduction in non-fuel operating costs can lead to a significant
improvement in operating results. In addition, we believe that all domestic
carriers are similarly impacted by changes in jet fuel costs over the long run,
so it is important for management and investors to understand the impact and
trends in company-specific cost drivers, such as labor rates, aircraft costs and
maintenance costs, and productivity, which are more controllable by management.
We have excluded costs related to the cargo operations as these operations do
not create ASMs. The cargo expenses in the reconciliation below are different
from the total operating expenses for our Cargo segment in
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
the "Segment Information" table presented above, due to several items that are
included in the Cargo segment, but have been captured in other line items used
in the Adjusted CASM calculation. Adjusted CASM further excludes special items
and other adjustments, as defined in the relevant reporting period, that are not
representative of the ongoing costs necessary to our airline operations and may
improve comparability between periods. We also exclude stock compensation
expense when computing Adjusted CASM. The Company's compensation strategy
includes the use of stock-based compensation to attract and retain employees and
executives and is principally aimed at aligning their interests with those of
our stockholders and long-term employee retention, rather than to motivate or
reward operational performance for any period. Thus, stock-based compensation
expense varies for reasons that are generally unrelated to operational decisions
and performance in any period.
As derivations of Adjusted CASM are not determined in accordance with GAAP, such
measures are susceptible to varying calculations and not all companies calculate
the measures in the same manner. As a result, derivations of Adjusted CASM as
presented may not be directly comparable to similarly titled measures presented
by other companies. Adjusted CASM should not be considered in isolation or as a
replacement for CASM. For the foregoing reasons, Adjusted CASM has significant
limitations which affect its use as an indicator of our profitability.
Accordingly, readers are cautioned not to place undue reliance on this
information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
The following tables present the reconciliation of CASM to Adjusted CASM.
Three
Months Ended
2022 2021
Operating Per ASM Operating Per ASM
Expenses (in cents) Expenses (in cents)
CASM $ 206,309 13.28 $ 152,342 9.83
Less:
Aircraft Fuel 64,843 4.17 36,647 2.37
Stock Compensation Expense 487 0.03 964 0.06
Special Items, net (a) - - (65) -
TRA expense (b) - - 25 -
Cargo expenses, not already adjusted
above 23,569 1.52 15,544 1.00
Sun Country Vacations 193 0.01 176 0.01
Adjusted CASM $ 117,217 7.55 $ 99,051 6.39
ASM (thousands) 1,553,483 1,549,432
Nine Months Ended September 30,
2022 2021
Operating Per ASM Operating Per ASM
Expenses (in cents) Expenses (in cents)
CASM $ 626,698 12.25 $ 348,756 7.98
Less:
Aircraft Fuel 206,334 4.03 90,631 2.07
Stock Compensation Expense 1,981 0.04 4,577 0.11
Special Items, net (a) - - (72,419) (1.66)
TRA expense (b) - - 340 0.01
Cargo expenses, not already adjusted
above 64,007 1.25 48,923 1.12
Sun Country Vacations 810 0.02 563 0.01
Adjusted CASM $ 353,566 6.91 $ 276,141 6.32
ASM (thousands) 5,114,134 4,368,972
________________________(a) The adjustments include Special Items, net, as presented in Note 12 of the
Company's Condensed Consolidated Financial Statements. (b) This represents the one-time costs to establish the TRA liability with our TRA
holders. See Note 11 of the Company's Condensed Consolidated Financial
Statements.
Liquidity and Capital Resources
The airline business is capital intensive. Our ability to successfully execute
our business strategy is largely dependent on the continued availability of
capital with attractive terms and maintaining sufficient liquidity. We have
historically funded our operations and capital expenditures primarily through
cash from operations, proceeds from stockholders' capital contributions, the
issuance of promissory notes, and debt financing.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Our primary sources of liquidity as ofSeptember 30, 2022 included our existing cash and cash equivalents of$131,912 and short-term investments of$135,170 , our expected cash generated from operations, and the$24,650 of available funds from the Revolving Credit Facility as ofSeptember 30, 2022 . In addition, we had restricted cash of$14,163 as ofSeptember 30, 2022 , which consists of cash received as prepayment for chartered flights that is maintained in separate escrow accounts in accordance with DOT regulations requiring that charter revenue receipts received prior to the date of transportation are maintained in a separate third-party escrow account. The restrictions are released once the charter transportation is provided. Our primary uses of liquidity are for operating expenses, capital expenditures, lease rentals and maintenance reserve deposits, debt repayments, working capital requirements, and other general corporate purposes. Our single largest capital expenditure requirement relates to the acquisition of aircraft, which we have historically acquired through operating leases, finance leases, and debt. Our management team retains broad discretion to allocate liquidity. We believe that our unrestricted cash and cash equivalents, short-term investments, and availability under our Revolving Credit Facility, combined with expected future cash flows from operations, will be sufficient to fund our operations and meet our debt payment obligations for at least the next twelve months. However, we cannot predict what the effect on our business and financial position might be from a change in the competitive environment in which we operate or from events beyond our control, such as volatile fuel prices, economic conditions, pandemics, weather-related disruptions, the impact of airline bankruptcies, restructurings or consolidations,U.S. military actions, regulations, or acts of terrorism. Aircraft - As ofSeptember 30, 2022 , we operated a fleet of 54 Boeing 737-NG aircraft. This includes 42 aircraft in the passenger fleet and 12 cargo operated aircraft through the ATSA. We may finance additional aircraft through debt financing or finance leases based on market conditions, our prevailing level of liquidity and capital market availability. We may also enter into new operating leases on an opportunistic basis. For more information on our fleet, see Note 6 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Maintenance Deposits - In addition to funding the acquisition of aircraft, we are required by certain of our aircraft lessors to fund reserves in cash in advance for scheduled maintenance to act as collateral for the benefit of lessors. Qualifying payments that are expected to be recovered from lessors are recorded as Lessor Maintenance Deposits on our Condensed Consolidated Balance Sheets. As ofSeptember 30, 2022 , we had$30,925 of total Lessor Maintenance Deposits. Investments - The Company invests its cash and cash equivalents in highly liquid securities with strong credit ratings. As ofSeptember 30, 2022 , the Company held$128,569 of debt securities, all of which are classified as current assets because of their highly liquid nature and availability to be converted into cash to fund current operations. Given the significant portion of our portfolio held in cash and cash equivalents, we do not anticipate fluctuations in the aggregate fair value of our investments to have a material impact on our liquidity or capital position. CARES Act - During 2021, we received grants totaling$71,587 from theTreasury under PSP2 and PSP3. We also received a CARES Act Loan of$45,000 inOctober 2020 , which was repaid in full onMarch 24, 2021 using proceeds from the IPO. In accordance with the$71,587 of grants received under the CARES Act, we are required to comply with the relevant provisions of the CARES Act and the related implementing agreements. The provisions related to the requirement that certain levels of commercial air service be maintained, if ordered by the DOT, and the prohibitions on share repurchases of listed securities and the payment of common stock (or equivalent) dividends, have lapsed as of the date of this filing. Restrictions on the payment of certain executive -55-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
compensation continue through
Credit Facilities - The Company uses its Credit Facilities to provide liquidity support for general corporate purposes and to finance the acquisition of aircraft. OnFebruary 10, 2021 , we entered into a Credit Agreement which includes a$25,000 Revolving Credit Facility and a$90,000 DDTL. The proceeds from the Revolving Credit Facility can be used for general corporate purposes, whereas the proceeds from the DDTL were to be used solely to finance the acquisition of aircraft or engines to be registered inthe United States . The Credit Agreement includes financial covenants that require a minimum trailing 12-month EBITDAR ($87,700 as ofMarch 31, 2022 and beyond) and a minimum liquidity of$30,000 at the close of any business day. The Company was in compliance with this covenant as ofSeptember 30, 2022 . During 2021, the Company drew$80,500 on the DDTL to purchase six aircraft, which were previously under operating leases. The Company repaid the outstanding balance for the DDTL in full inMarch 2022 using proceeds it received from the 2022-1 EETC. No amounts under the DDTL are available to the Company as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , the Company had$24,650 of the$25,000 Revolving Credit Facility available and no balance drawn. Debt - At our discretion, we obtain debt financing through the issuance of pass-through trust certificates to purchase, or refinance, aircraft. InDecember 2019 , we issued the 2019-1 EETC, for the purpose of financing or refinancing 13 used aircraft. InMarch 2022 , the Company arranged for the issuance of the 2022-1 EETC in an aggregate face amount of$188,277 for the purpose of financing or refinancing 13 aircraft. The 2022-1 EETC is secured by a lien on the financed or refinanced aircraft and is cross collateralized by the other aircraft financed through the issuance. Total appraised value of the aircraft and engines financed by the 2022-1 EETC was approximately$259,688 as of the original date of the agreement. For more information on our credit facilities or debt, see Note 7 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. The table below presents the major indicators of financial condition and liquidity: September 30, 2022 December 31, 2021 Cash and Cash Equivalents$ 131,912 $ 309,338 Available-for-Sale Securities 128,569 - Amount Available Under Revolving Credit Facility 24,650 25,000 Total Liquidity$ 285,131 $ 334,338 September 30, 2022 December 31, 2021 Total Debt$ 370,197 $ 277,426 Finance Lease Obligations 255,128 192,155 Operating Lease Obligations 27,789 76,041 Total Debt and Lease Obligations 653,114 545,622 Stockholders' Equity 508,005 490,589Total Invested Capital $ 1,161,119 $ 1,036,211 Debt-to-Capital 0.56 0.53 -56-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Sources and Uses of Liquidity
Nine Months Ended September 30,
2022 2021
Total Operating Activities $ 71,671 $ 116,358
Investing Activities:
Purchases of Property & Equipment (177,658) (118,016)
Proceeds from the Sale Property & Equipment 777 -
Proceeds from Insurance Settlements 8,865 -
Purchases of Investments (130,529) (1,436)
Proceeds from the Sale of Investments 935 1,062
Total Investing Activities (297,610) (118,390)
Financing Activities:
Cash Received from Stock Offering, net - 227,188
Proceeds from Stock Option and Warrant Exercises, net 1,625 2,407
Proceeds from Borrowings 188,277 80,500
Repayment of Finance Lease Obligations (37,842) (9,113)
Repayment of Borrowings (95,305) (75,728)
Debt Issuance Costs (2,526) (2,560)
Total Financing Activities 54,229 222,694
Net (Decrease) Increase in Cash $
(171,710)
"Cash" consists of Cash, Cash Equivalents and Restricted Cash
Operating Cash Flow Activities
Operating activities in the nine months ended
Our operating cash flow is primarily impacted by the following factors:
Seasonality of Advance Ticket Sales. We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in Air Traffic Liabilities. Air Traffic Liabilities typically increase during the fall and early winter months as advanced ticket sales grow prior to the late winter and spring peak travel season and decrease during the summer months. Fuel. Fuel expense represented approximately 33% and 26% of our total operating expense for the nine months endedSeptember 30, 2022 and 2021, respectively. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations. Fuel consumption increased by 20% during the nine months endedSeptember 30, 2022 compared to prior year, consistent with increased passengers as the impact -57-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) of the pandemic subsides. Additionally, the cost per gallon increased by 83% year-over-year. We expect a trend of higher year-over-year fuel costs per gallon to continue for the remainder of 2022 due to current market conditions, further exacerbated by global geopolitical events. CARES Act. During the nine months endedSeptember 30, 2022 we did not receive any funding from the CARES Act. During the nine months endedSeptember 30, 2021 , we received$71,587 in CARES Act grants and$848 in employee retention tax credits.
Investing Cash Flow Activities
Capital Expenditures. Our capital expenditures were$177,658 and$118,016 for the nine months endedSeptember 30, 2022 and 2021, respectively. Our capital expenditures during the nine months endedSeptember 30, 2022 primarily included the purchase of five incremental aircraft, two aircraft off operating leases, five spare engines, prepayment of$8,781 towards a flight simulator, and other miscellaneous projects. The final installment on the flight simulator will be remitted to the seller upon receipt and installation. The purchases of the aircraft previously under finance leases were recorded as a non-cash investing activities. Our capital expenditures during the nine months endedSeptember 30, 2021 were primarily related to the purchases of seven aircraft, six of which were existing aircraft previously under operating leases.
Investments. During 2022, the Company purchased
Financing Cash Flow Activities
IPO. In
Debt. InMarch 2022 , the Company arranged for the issuance of the 2022-1 EETC in an aggregate face amount of$188,277 for the purpose of financing or refinancing 13 aircraft. Five of these aircraft were owned fleet assets previously financed by the DDTL, which was repaid with the proceeds from the 2022-1 EETC. For additional information regarding these financing arrangements, see Note 7 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Finance Leases. Our repayments of finance lease obligations were$37,842 and$9,113 for the nine months endedSeptember 30, 2022 and 2021, respectively. During 2022, the Company exercised the purchase options on two finance leases using proceeds from the issuance of the 2022-1 EETC. The resulting cash outflows are recorded as payments for finance lease obligations. There were no similar transactions during the nine months endedSeptember 30, 2021 .
Off Balance Sheet Arrangements
Indemnities. Our aircraft, equipment and other leases and certain operating
agreements typically contain provisions requiring us, as the lessee, to
indemnify the other parties to those agreements, including certain of those
parties' related persons, against virtually any liabilities that might arise
from the use or operation of the aircraft or such other equipment. We believe
that our insurance covers most of our exposure to liabilities and related
indemnities associated with the leases described above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Pass-Through Trusts. We have equipment notes outstanding issued under the 2019-1 EETC and 2022-1 EETC. Generally, the structure of the EETC financings consists of pass-through trusts created by us to issue pass-through certificates, which represent fractional undivided interests in the respective pass-through trusts and are not obligations of Sun Country. The proceeds of the issuance of the pass-through certificates are used to purchase equipment notes which are issued by us and secured by our aircraft. The payment obligations under the equipment notes are those of Sun Country. We use these certificates to finance or refinance aircraft purchases. The obligations are listed in Note 7 of the Condensed Consolidated Financial Statements included in Part I, Item I of this report. Fuel Consortia. We currently participate in fuel consortia atMinneapolis-Saint Paul International Airport ,Las Vegas International Airport ,Dallas-Fort Worth International Airport ,San Diego International Airport ,Los Angeles International Airport ,Seattle Tacoma International Airport ,Portland International Airport ,Phoenix Sky Harbor International Airport ,Orlando International Airport ,Southwest Florida International Airport andSan Francisco International Airport and we expect to expand our participation with other airlines in fuel consortia and fuel committees at our airports where economically beneficial. These agreements generally include cost-sharing provisions and environmental indemnities that are generally joint and several among the participating airlines. Consortia that are governed by interline agreements are either, (i) not variable interest entities ("VIEs") because they are not legal entities, or (ii) are variable interest entities, but the Company is not deemed the primary beneficiary. Therefore, these agreements are not reflected on our Condensed Consolidated Balance Sheets. There are no assets or liabilities on our Balance Sheets related to these VIEs, since our participation is limited to purchasing aircraft fuel.
We have no other off-balance sheet arrangements.
Commitments and Contractual Obligations
We have contractual obligations comprised of aircraft leases and supplemental maintenance reserves, payments of debt, interest, other lease arrangements, and the TRA. During the second quarter of 2022, an owned aircraft was retired due to the aircraft sustaining damage beyond economic repair. The best estimate of this event was recorded as of the second quarter and had no financial impact on the Company's Condensed Consolidated Statement of Operations. The estimate will be revised when additional information becomes available or when the contingency is finalized. The Company does not believe the finalization of the contingency will have a material effect on the Company's Condensed Consolidated Results of Operations. During the nine months endedSeptember 30, 2022 , the Company executed an agreement to purchase a flight simulator at a total purchase price of$9,745 . To date,$8,781 has been remitted to the seller. The remaining purchase price will be remitted to the seller upon receipt and installation of the simulator. Payments for the simulator are accounted for within Property & Equipment on the Condensed Consolidated Balance Sheets as ofSeptember 30, 2022 . For additional information, refer to Note 13 Commitments and Contingencies to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. Except as described herein, there have been no material changes in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year endedDecember 31, 2021 . -59-
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