Wall Street Hopes There's No Country Like Sun Country
It’s the odd airline that chooses now to go public. Tiny Sun Country fits the bill.
Why would an airline go public now, during a crisis that has left the industry staggering and forced most carriers to contemplate a smaller, much more limited near-term future? Why go public now in an environment so severe that even a stalwart like Southwest posted its first losses in almost 50 years?
Because Sun Country isn’t like other airlines. The Minneapolis-based low-cost carrier did something that most other airlines could not last year: It turned a profit. The carrier reported 2020 net profit of $4.1 million and an operating profit of $21.8 million in a year when even Allegiant reported a $184 million net loss. No U.S. carrier that has reported earnings for the past year can claim this achievement.
Sun Country, like other airlines, did have a little help from Uncle Sam. It took more than $62 million in federal aid through the CARES Act and the subsequent coronavirus fiscal aid package. But the carrier reported an operating margin of 7.4 percent for the first nine months of last year, which it achieved, in part, by cutting costs once the pandemic began.
Sun Country last week filed its intent to offer shares with the U.S. Securities and Exchange Commission (SEC) on February 8. The airline offered few details on its plans, with the number of shares and their price to be determined. Barclays, Morgan Stanley, and Deutsche Bank, together with Sun Country’s current owner, Apollo Global Management, are underwriting the offering.
It’s been years since an airline went public. The last major airline to go public was Virgin America in 2014, although regional carrier Mesa Airlines floated its shares in 2018. Since then, of course, the Covid-19 pandemic struck and brought the airline industry to its knees. The U.S. government has funneled $65 billion in aid to the industry since last March, with more possibly coming.
Given Sun Country’s profitability, and the continued frothiness of the stock market despite macroeconomic uncertainty, Apollo may think now is the right time. “Historically, private equity looks at a five-year investment cycle,” said Raymond James airline analyst Savanthi Syth. “If they can IPO now, that would give Apollo a pathway to exit over the next few years.’
But the pandemic hasn’t been unkind to all travel companies. AirBnB, the hospitality behemoth, raised almost $4 billion in its initial public offering in December, even as the pandemic sapped demand for travel. In its prospectus filed to the SEC, Sun Country said it is hoping to raise at least $100 million. “Airline stocks and investor sentiment in the sector is still somewhat challenged, but at least well off of the lows,” Syth adds.
That could be argument enough for Apollo, which acquired Sun Country in 2017. Apollo signaled its intention to float Sun Country more than year ago. At the time, CEO Jude Bricker said the company saw a window of opportunity to go public and “didn’t want to miss it.”
Apollo bought the carrier from its former owners, two Minneapolis-based brothers who made their fortunes through dairy and quartz-countertop businesses. They bought the bankrupt carrier in 2011 and brought Allegiant veteran Bricker on in 2017 to reimagine the airline.
And reimagine it he did. Sun Country went from a hybrid airline with a premium class to an airline built around the price-conscious leisure traveler, taking them from its Minneapolis base to leisure destinations in the U.S., Mexico, and the Caribbean.
Sun Country’s Leisure-Focused Network
In addition to its traditional business flying almost entirely leisure travelers from the Upper Midwest to southern beaches, it launched cargo flights under a deal with e-commerce giant Amazon early last year. In what now appears a prescient diversification of its business, cargo revenues jumped from nothing to $17.5 million — a small but tidy sum — during the first nine months of 2020.
This helped offset the lost revenue from Sun Country’s other business lines and allowed it to continue hiring pilots at a time when most of the industry was asking for concessions or threatening furloughs. “The [Amazon deal] has generated consistent positive cash flows through the Covid-19-induced downturn,” the company noted in the filing with the SEC.
While Sun Country does not mention any agreement to expand flying for Amazon beyond the 12 Boeing 737 freighters it currently flies for the online giant, the airline does plan to grow in 2021. The carrier said it has “identified” three to five used 737-800s it could acquire for growth this year. The aircraft would complement the 31 737s — 30 -800s and one -700 — it currently flies.
“We believe the airline industry will rebound in the back half of 2021 and normalize in 2022,” Sun Country said in the prospectus. Much of these hopes are pinned on widespread distribution of Covid-19 vaccines and the ensuing return of travel demand.
But Sun Country acknowledged that its hopes for a rebound are not without risks. “We are depending upon a successful Covid-19 vaccine and significant uptake by the general public in order to normalize economic conditions, the airline industry, and our business operations, and to realize our planned financial and growth plans and business strategy,” Sun Country said in its SEC filing.
New quarantines or travel restrictions, the failure of vaccines to contain the disease, and the possible requirement to test domestic travelers for Covid-19 also could affect the company’s plans, the carrier added. Furthermore, Sun Country generates a significant amount of revenue from its charter operations, especially with sports teams. More cancellations of sporting events will hit its bottom line, the company said.
Sun Country also is particularly at risk if a recession lingers after the pandemic recedes. Its passengers are mainly price-conscious leisure travelers, who are more likely to put off or cancel trips if their discretionary income falls.
So yes, there are risks, but the carrier and its backers see ample opportunity for reward. Will Sun Country be the next AirBnb? Unlikely. But with its diversified business of scheduled and charter flights, strong leisure route network, and growing Amazon cargo operation, the question probably shouldn’t be “Why now?” but “Why not now?”