Sun Country is tired of carrying you self-loading cargo around for prices that are too low, so now it’s pivoting toward more cargo flying. Amazon likes this plan, and investors should too. But if you happen to like flying from Minneapolis to, say, Indianapolis, this might be bad news for you.
In December 2019, Sun Country signed a deal to fly cargo around for Amazon using 12 Boeing 737-800 freighters. These airplanes were owned by Amazon but flown by Sun Country. The deal was for six years with two, two-year options.
During the pandemic, this was a godsend as the passenger business tanked. But since that time, well, it’s become a bad deal. Just take a look at these operating margins for the two sides of the business (excluding special items in 2020/2021).
The good news for Sun Country is that cargo has only been about 10 percent of total revenues. So while it has been losing some money, it’s not the overwhelming majority of operations.
You’d think these numbers would mean Sun Country would try to push further into the passenger market, but that’s not the case. So what’s going on?
First of all, revenues are starting to get a little softer. Q1 2023 saw an operating margin over 21 percent, so it’s falling off a bit. But Q1 is always the airline’s best quarter since that’s when Minnesotans in the airline’s MSP hub will pay ANYTHING to escape to somewhere that isn’t freezing. Q2 guidance, however, was affirmed to be coming in at the lower end of the previous range. So weakness is happening.
And as Sun Country continues to grow, it keeps stretching into thinner and thinner markets. This year, MSP has gained service on Sun Country to Albuquerque, Billings, Boise, Cleveland, Grand Rapids, Manchester (NH), Missoula, Monterey (CA), Oakland, and Syracuse among others. There is only so much you can grow from that market.
With this obvious problem facing the airline, it did the best thing it could think of… it went back to Amazon (or Amazon came to it, I suppose) to get a bigger and better deal.
Starting after next Q1’s peak, Sun Country will add 8 more 737s for a total of 20 under the Amazon banner. As usual, these airplanes will be owned by Amazon and operated by Sun Country, so it’s not a very capital-intensive project for the airline. And as the investor presentation states:
Revised economics reflect reality of higher post-covid cost environment
Steady state contribution margin of Amazon flying under the revised agreement now on par with historical passenger margins
That’s a big change in economics if we assume it means about a 20 point swing in margin for the Amazon business. Why would Amazon do this? Well, if you want to keep getting your stuff shipped quickly, Amazon has to pay more. It’s just the reality of a post-COVID world where things are more expensive.
Amazon really learned this the hard way when its deal with Atlas Air was recently terminated two years before it was to expire in 2026. Atlas had been flying 17 Boeing 767-300s and… wait for it… 8 Boeing 737s. It’s those 737s that I assume are moving over to Sun Country now. At this point, Sun Country will be the only narrowbody operator for Amazon in the US.
Next year, cargo flying will increase 61 to 63 percent for Sun Country. Since these are all airplanes owned by Amazon, I figured it didn’t have to impact the passenger business, but it will. Passenger capacity will be down 10 to 12 percent in 2025 before starting to grow again in 2026.
I asked Sun Country if these reductions were a strategic decision due to weakness or if it was necessary to help stand up the cargo growth. A spokesperson for the airline tells me it was both.
A strategic decision in that Amazon growth became an opportunity to seize now and provide the company with that steady flying, year round stability and improved economics.
In addition, we will need to allocate resources to bring those aircraft in, including Tech Ops (may hire staff in outstations included [Fort Worth], Lakeland, and Cincinnati). And we will need to continue hiring pilots and upgrading [first officers] to captains.
Overall, this looks like a great deal for Sun Country. It helps make the cargo work profitable while extending the agreement to 2030 (with options that go to 2037). Further, it allows the airline to pull back on passenger capacity when weakness is starting to creep in. Those thinner, weaker routes like Indianapolis are the ones that will likely suffer the most.
That being said, this doesn’t necessarily bode well for Sun Country’s long-term future as a growing passenger carrier. If MSP is tapped out, then what? Nothing else it has tried in recent times has worked. It will need to figure out a new plan eventually, but for now, it can bask in the glow of all those boxes.
