Sun Country Airlines (SNCY), in its second-quarter earnings call for 2024, revealed a mixed financial performance with growth in certain segments despite broader industry headwinds. The company reported a 2.6% decline in total revenue, with scheduled service revenue down by 7.2%. However, charter and cargo revenues saw an uptick, rising 2.8% and 1.7%, respectively. Sun Country anticipates fare pressure to ease and expects a strong winter season for leisure travel, with mid-single-digit capacity growth on the horizon.
Key Takeaways
- Total revenue decreased by 2.6% for Q2 2024.
- Scheduled service revenue fell by 7.2%, while charter revenue grew by 2.8%.
- Cargo revenue increased by 1.7%.
- Operating expenses rose by 7.3%, but CASM declined by 5.1%.
- Q3 revenue is projected to be between $245 million and $255 million, with an operating margin of 3-5%.
- The company has completed over $100 million in share buybacks.
Company Outlook
- Sun Country expects fare pressure to decrease later in the year.
- Plans are in place for aggressive capacity reallocation into charter and cargo segments.
- A strong winter season for leisure travel is anticipated.
- The company is optimistic about the cargo segment's growth by 60-63% in block hours for 2025.
Bearish Highlights
- The industry is currently experiencing overcapacity.
- There are limited growth opportunities outside of Minneapolis.
- Total revenue and scheduled service revenue have declined.
Bullish Highlights
- Charter and cargo segments are experiencing revenue growth.
- The competitive environment in Minneapolis is expected to improve.
- The company is confident in its capacity growth, blackout growth, and free cash flow production.
Misses
- Extended aircraft outages and an IT outage were challenges faced in the quarter.
- The scheduled service segment is expected to decrease by high single-digits.
Q&A Highlights
- The company discussed its strategy to mitigate the impact of CASM through charter market opportunities.
- Sun Country is not planning to issue more debt for stock buybacks, aiming for a conservative balance sheet.
- The team was commended for executing well during challenging times.
In the face of extended aircraft outages and an IT outage, Sun Country Airlines has managed to see growth in scheduled service departures. The company's diversified business model, which includes a combination of scheduled service, charter, and cargo operations, has enabled it to mitigate some of the impacts of these challenges. Sun Country plans to continue its strategic reallocation of capacity to optimize its business segments.
Despite a decline in total revenue, the airline has seen positive developments in its charter and cargo operations, which are expected to become a more significant part of the revenue mix in the coming years. Sun Country's leadership is confident in the company's ability to navigate the current overcapacity in the industry and expects fare pressure to subside as the year progresses.
The airline's conservative approach to liquidity management and capital allocation has allowed it to maintain a lower level of liquidity on its balance sheet, supported by the predictability of its revenue streams. Sun Country's strategy of waiting for competitors to face challenges before seeking new growth opportunities indicates a cautious and opportunistic approach to expansion.
Overall, Sun Country Airlines remains optimistic about its future prospects, with plans for fleet expansion and a focus on leveraging its charter and cargo segments to drive growth and profitability. The company's ability to maintain operational flexibility and financial discipline will be key to its success in the competitive airline industry.
Full transcript - Sun Country Airlines Holdings (SNCY) Q2 2024:
Operator: Welcome to the Sun Country Airlines’ Second Quarter 2024 Earnings Call. My name is Crystal, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call will be recorded. I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.
Chris Allen: Thank you. I'm joined today by Jude Bricker, our Chief Executive Officer; Dave Davis, President and Chief Financial Officer and a group of others to help answer questions. Before we begin, I'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements, which are based upon management's current beliefs, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review our risk factors and cautionary statements outlined in our earnings release and our most recent SEC filings. We assume no obligation to update any forward-looking statements. You can find our Q2 2024 earnings press release on the Investor Relations platform of our website at ir.suncountry.com. With that said, I'd now like to turn the call over to Jude.
Jude Bricker: Thanks, Chris. Good morning, everyone. Our diversified business model is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule flexibility and low fixed-cost model allows us respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to our structural advantages we'll be able to reliably deliver industry leading profitability throughout our cycles. I want to start by acknowledging our employees that have worked so hard through this challenging summer. In both June and July, we've grown scheduled service departures in excess of 15% year on year, while facing some extended aircraft out of service events and an IT outage that temporarily disabled the key operational system. Our employees, like usual, delivered for our customers, and I'm personally grateful. There's been a lot of discussion about overcapacity in our industry. For us, in our key market of Minneapolis, the domestic seat growth rate peaked in July and subsides through the rest of the year and into the next spring. As such, we expect lessening fare pressure as we move through the year. It's encouraging to see the industry move aggressively to right size schedules. Our reaction to changes in market environment will always be to adjust capacity. Our July Minneapolis seats were up 29% year on year. By September, our seats will be down 9% year on year. July scheduled service volume will be 2.25 times larger than September, September always being the most challenging month for leisure demand. As already announced, we will move capacity aggressively into our other segments, charter and cargo. We still expect a strong winter season for leisure and are planning mid-single-digit capacity growth for our peak upcoming winter. I want to point out that June and July continued to be strong demand months for our scheduled service product. We had sold loads in excess of 85% during both months with unit revenues up nearly 20% versus pre-COVID comps even considering our growth. Our ability to manage off-peak capacity while maintaining our unit cost advantage mostly explains the outperformance of our scheduled business as compared to other domestic leisure carriers. In cargo, we have contractual growth along with rate improvements through the end of 2025. For charter, while volumes were generally flat, we've been able to manage to higher margins as we adjust our pre-COVID long-term contracts to the new cost environment. As mentioned before, we have fleet expansion plans of 71 aircraft from our current in-service fleet of 56. All this growth will come from our leased-out fleet, seven aircraft, and from committed cargo deliveries, eight aircraft, in both cases, this growth won't require additional CapEx. We expect to continue to deliver high free cash flow yields in the near and mid-term. And with that, I'll turn it over to Dave.
David Davis: Thanks, Jude. We're pleased to report that Q2 was our eighth quarter of profitability number that for the first half of 2024 Sun Country was most profitable airline in the U.S. This is despite that unlike for most other carriers, Q2 was a seasonally slower quarter for Sun Country. The domestic revenue environment continues to be impacted by overcapacity and the resultant impact on fares as a domestic-focused LCCs the hardest. Our resilient business model has allowed us to remain profitable because of the diversity of our revenue streams. As we move through the third quarter, we are slowing scheduled capacity growth. While our model allows us to make tactical capacity allocation decisions quickly, large moves require several quarters to execute. As we mentioned during our announcement of our revised agreement with Amazon (NASDAQ:AMZN), Sun Country's cargo segment will become a larger portion of our business starting in mid-2025. By 2026, we expect revenue from our cargo segment to be almost 20% of our total revenue versus approximately 10% in 2024. The expansion of our cargo segment comes with almost no required CapEx and drives improved profitability and greater free cash flow. This is the essence of the Sun Country business model. Let me now turn to the specifics of the second quarter. First to revenue and capacity. In the second quarter, total revenue declined 2.6% versus the second quarter of 2023 to $254.4 million. For our Passenger segment, which includes our scheduled service and charter businesses, total revenue fell 5% year-over-year. Scheduled service revenue declined 7.2%, driven by a 21.3% decline in scheduled service TRASM and an 18.2% increase in ASMs. Clearly, we flew more during off peak periods than the demand environment could support. In addition, we were impacted by late June operational challenges in MSP that reduced passenger revenue by between $1 million and $1.5 million. In response to the soft demand environment, we're curtailing our growth in the third quarter and expect scheduled service ASMs to be up 7% to 8% year-over-year versus roughly 15% we were originally planning. We expect year-over-year growth to fall further in Q4. The pull-down comes mainly from reducing off-peak flying. Scheduled service ASMs for our full network will still grow in July, by about 16% year-over-year, but by September they will shrink by 11%. Average total fare per passenger fell by 20.1% during the quarter. While total fare has declined versus last year, the second quarter was the first since COVID that we flew more ASMs in the second quarter of 2019. And Q2 2024 scheduled service TRASM was 12.3% higher than Q2 of 2019. Charter revenue in the second quarter grew 2.8% to $51 million which was a new quarterly high. This result was even more impressive as second quarter charter block hours declined 10.2% year-over-year due to scheduling improvements, which reduced the number of ferry flights we operated. Ad hoc charter revenue grew significantly versus last year and was 23% of the total charter revenue versus 13% in the second quarter of last year. For our Cargo segment, revenue grew by 1.7% to $25.4 million and a 2.4% decrease in block hours. Cargo block hours are influenced by scheduled heavy maintenance events, which drive moderate changes in aircraft availability. We expect year-over-year cargo block hours to grow in both the third and fourth quarter of this year and then to inflect sharply upward in 2025 as we take on an expected eight additional freighter aircraft throughout the year. June was the first month that a portion of the revised Amazon contract rates went into effect. The full impact of the new rates will not be in effect until the second half of 2025. Turning now to costs. Second quarter total operating expenses increased 7.3% and an 8.9% increase in total block hours. CASM declined by 5.1% versus the second quarter of 2023, while adjusted CASM declined 4.9%, marking our third consecutive quarter of year-over-year declines. As our pilot availability issues have eased, we've been able to grow flying through higher aircraft utilization, which was 7.5 hours per day in the second quarter, up 11.9% versus the second quarter of last year. Our decline in CASM came despite increases in both ground handling costs and higher airport fees. Ground handling expenses grew by 16.6% year-over-year, driven by a 20% increase in scheduled service departures, while the roll-off of COVID relief payments that airports had been using to minimize rate increases contributed to a 14.9% increase in landing fees and airport rent expenses. As we move into Q3, the slowing growth in our scheduled service business is likely to result in an increase in adjusted CASM. Regarding our balance sheet, our total liquidity at the end of the second quarter was $153 million. Year-to-date, we spent $38.2 million on CapEx. At this point, we do not need to purchase any incremental aircraft until we begin looking for 2027 capacity. We continue to generate strong free cash flow and we still anticipate full year 2024 CapEx to be well below $100 million. Our leverage remains low with our net debt to adjusted EBITDA ratio at the end of the second quarter at 2.6 times. Finally, the effective income tax rate increased substantially during the three months ended June 30, 2024 as compared with the prior year due to some additional tax expense related to stock compensation. Turning to our guidance, we expect second quarter -- total sorry, third quarter total revenue to be between $245 million and $255 million on block hour growth of 5% to 8%. We are anticipating our cost per gallon for fuel to be $2.82 and for us to achieve an operating margin between 3% and 5%. Our business is built for resiliency and will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, I'll open it up for questions.
Operator: Thank you. [Operator Instructions], And our first question will come from Ravi Shanker from Morgan Stanley (NYSE:MS). Your line is now open.
Ravi Shanker: Thanks. Good morning, everyone. So big capacity cuts in the back half that is good to see from an overall industry perspective. But given your unique model and the ability to move around resources, kind of is there anything you guys can do to reallocate those resources to kind of offset the impact on CASM?
David Davis: Probably in the second half of the year. To some extent, the answer to that is yes, but probably not fully. We've been consistently coming in favorable to our cost projections the company has done a great job on that front. Just given the sort of pull down that we've done fairly recently, we'll be able to offset some of the CASM impact, but probably not all of it. We'll be looking for reallocation opportunities, particularly in the charter market, as sort of much as we can here on relatively short notice.
Jude Bricker: I also add that our charter operations drive higher unit costs than do our scheduled service capacity. So, it won't be apples-for-apples as we exchange into charter from scheduled service. And finally, really unit revenue -- unit costs inflect when we start operating below minimum guarantees for our crews and we won't hit that level anyway. So, we'll still be in an efficient bandwidth.
Ravi Shanker: Understood. That's really helpful. And maybe as a follow-up, kind of, how would you characterize the competitive environment in Minneapolis? It's going to be -- we heard reports that Delta maybe looking to ramp up there. So, has anything changed there?
Jude Bricker: Mostly, I mean, I'm getting the information from selling schedules, which are out through March of next year, and we see July as being the peak growth rate across our network for all OAs, and an improving condition all the way through the end of the year and into next spring.
Operator: Our next question will come from Duane Pfennigwerth from Evercore ISI. Your line is open.
Duane Pfennigwerth: Good morning. Can you remind us how much liquidity you want to keep on the balance sheet? Is there any desire to build up dry powder ahead of the cargo ramp next year? And just given the free cash flow you expect to generate, how are you thinking about capacity for buybacks for the rest of this year?
David Davis: Yes. We're sort of at a liquidity trough for the year at sort of this time and we'll start building liquidity as we begin selling sort of our winter schedule, peak liquidity sort of towards the end of the year. The thing about the liquidity of this business is we think we can operate this at probably relatively lower levels of liquidity than other airlines, because a big chunk of our revenue stream is very predictable between our cargo and charter businesses. I hesitate to throw out an exact minimum liquidity number, but it's well below where we're at today. There's really not that much of a need to build liquidity, as we head into the cargo ramp, because there's really no CapEx required or very, very little CapEx required. It will be continuing the stream of pilot hiring that we're doing and then a reallocation of some resource from our scheduled service into the cargo business. There's not really any kind of a significant liquidity need there. That will be a liquidity-positive event for us because of the improved profitability of the new cargo flying. To your second question, we've done well over $100 million in share buybacks and we'll sort of continue to look at our free cash flow profile. We're paying back a lot of debt and our debt balances are coming down pretty quickly. This is something that's always on our plate and we'll probably revisit and take another look at as we move through this year and early into next.
Jude Bricker: Just one more thing on that Duane. I mean, typically airlines require a lot of working capital to transition new fleets because of crew training and things like that. I just want to remind everybody that our pilots do all the flying that we do across all three segments from a single base. There's really no incremental operating costs associated with the transition either.
Duane Pfennigwerth: Yes, that's very clear, good reminders. And just to follow-up on Charter, how do you view the opportunity set now? And maybe just operationally, what is the lead time you need to kind of tilt harder into that segment versus maybe scheduled service? Is that -- are you looking one to two quarters out or can you react to opportunities closer in? Thanks for taking the questions.
Jude Bricker: Hey, Duane, why don't I start and I'll turn it over to Grant. So, the charter comes in kind of two flavors. One is contracted charter flying, which is under long-term agreements. It's about seven aircraft, worth of flying that we do that's related to that. And essentially, it's us being an airline for someone else. And it's the same aircraft that our passenger scheduled service fleet operates. So, it's interchangeable, but it's very dependable volumes and profitability. And then there's a big section of charters that's ad hoc, which is booked relatively close in, high margin flying, and mostly a way for us to allocate surplus capacity into profitable flying. And that's the domestic military market that we participate in, a significant amount of sports charters that we do for predominantly NCAA Sports and Major League Soccer. So, those are a little bit harder to predict because it's close in, but we're pretty bullish on it going into this fall as we've continued to expand that market. Grant, any other color on that?
David Davis: Yeah. The only thing I would add would be even in the second quarter when we really were biased towards scheduled service growth using up what we thought were pretty much all of our crew resources. We still were able to pivot pretty significantly, as Jude mentioned, to those military trips and those close in ad hoc trips. And as we look towards the back half of the year, we're going to be very aggressive. There's really, we don't have to wait. Those requests are coming to us and the team is very poised to go out. And where there's an opportunity where we can do it profitably, we're going to do it. And we have such a good reputation in the marketplace that people come to us pretty quickly when we have that capacity. And when we do things do get tight, we sort of take that capacity off, so we can turn it on very, very quickly which we're doing right now.
Duane Pfennigwerth: Okay. Thank you.
Jude Bricker: Thanks, Duane.
David Davis: Thanks, Duane.
Operator: Thank you. Our next question will come from Scott Group from Wolfe. Your line is now open.
Scott Group: Hey, thanks. Good morning, guys. With the capacity you're talking about, are you in the camp of a September RASM inflection? And then is there in your mind, is there a risk like this is just like a head fake of September's off-peak and its capacity starts to reaccelerate in Q4?
Jude Bricker: No. I think we're seeing a structural change in the growth rate. I think we saw a reallocation of capacity into the domestic leisure market in ‘22 and then capacity chase that demand into big market connectivity, Transatlantic, the Midwest was kind of late to get those capacity growth reallocations from the post-COVID environment and we saw growth rates peak in July. And everybody is selling out through April now. So, I feel fairly confident that our peak winter schedule will show the kind of profitability that we're all expecting as we move into this winter. So, no, I don't think that's the case. September for us...
Scott Group: The September piece?
Jude Bricker: Yes, September for us is always challenging. So, when we cut down capacity, obviously, we're able to identify the flights down to the very flight level that aren't going to make positive contribution and cut those out. So, we're expecting a pretty good September all things equal, because we've had the time to prepare under the current environment, which is substantially different than when we planned the year out.
Scott Group: Thank you. Can you just remind us the timing of the aircraft ramp with Amazon? And then you had a comment that, we're seeing a partial impact of the higher rates in June, but we don't see the full impact until the second half next year. Can you just talk about that?
David Davis: Yes. I can't go into the details on how the rates come in, but basically, we got a partial increase in rate when we signed the deal. Really that didn't have any impact on our numbers until June. So, the effect of the second quarter of the new Amazon rates is very small. But there's this piece that came in, when we signed the deal and then additional increases as the aircraft come in. And the aircraft right now, we expect to start arriving in March of 2025, and then to come in relatively quickly, so that by the third quarter, they're kind of all on-board here now. Things can move left to right a little bit, but that's the instruction we've been given and sort of the path that we're on.
Scott Group: And so, we still get like this, I guess, for lack of a better word, like two bites of the apple next year, where we get the Q1 benefit of schedule and then we get the cargo ramp in the rest of the year.
David Davis: Yes, that's exactly right. Look, we're really bullish on next year and part of the reasons what you just said. So, we're going to be able to continue allocating all of our resources to scheduled service or as much as necessary to scheduled service in Q1, which obviously is the biggest quarter for us by far and then transition very smoothly as things slow down for us into the cargo business more. So, it kind of works out really well.
Operator: Thank you. Our next question will come from Michael Linenberg from Deutsche Bank (ETR:DBKGn). Your line is open.
Michael Linenberg: Good morning, everyone. When I look at, your schedule to the winner, you talk about 55 or more than 55 cities that you're going to serve non-stop for Minneapolis. When I think about, what you're going to serve and maybe what you were serving a year ago, it does seem like there are some markets that you have pulled out of. Curious what is the common denominator in some of those markets? Was it just they didn't ramp up well, they didn't accompany maybe some of the charter flying that you did? Maybe they were sort of part of the package? Or, it's just a competitive response, anything we can take away from that?
Jude Bricker: Well, first, there's seasonal markets that happen across our network, that are going to be repetitive every year. And nearly everything every market works from Minneapolis. In June July, nearly all of our winter I mean, we need more capacity in winter, and nearly everything works. I think everything works in that period of time as well, but they're very different networks, summer to winter. I think the thing to watch is, as we go into the summer of 2025, some of our markets will need to be suspended through summer of 2025 and not come back into the network till future years and that's because of reallocation into cargo. But our winter network will be intact, yeah.
Michael Linenberg: Okay. That's helpful. And then just secondly, as you ramp and bring on the additional airplanes and you talk about sort of reallocating resources, where are we on pilots and staffing, first officers versus captains? Should we see any sort of teething issues as we ramp up into 2025 with the additional airplanes coming on for cargo, et cetera? Thanks. Thanks for taking my question.
Greg Mays: Yeah, this is Greg Mays. I think with regard to pilots, we've been able to allocate resources and not be constrained by pilots or staffing really generally. So, as we look out into 2025, we don't see any change to that. We see overall industry hiring is way down. So, things look good for us. We still would love to have more captains upgrade, but at this point in time, that's not constraining our growth. We feel really, as Dave said, bullish about 2025.
Michael Linenberg: Great. Thanks.
Operator: Thank you. [Operator Instructions]. And our next question will come from Tom Fitzgerald from TD (TSX:TD) Cowen. Your line is open.
Tom Fitzgerald: Hi, everyone. Thanks for the time. Can we just go back to capital allocation again and just, given everything with where the business is going and how cheap the stock is right now, why not issue debt instead of paying down debt and use the proceeds to buy back your stock?
Jude Bricker: Look, we've sort of considered all different avenues here. Debt isn't sort of cheap as it could be at this point. We're kind of looking at everything. We're sort of making capital allocation decisions here, not just for the next three to six months, but for the long term. We want to continue to operate with a conservative balance sheet, and sort of loading up with more debt right now to buy back stock is probably not something that we're going to do in the short term.
Tom Fitzgerald: Okay. Fair enough. That's helpful. And then just like longer term kind of as you what you kind of get on past 2026, just how are you thinking about the network and whether you need another focus study beyond Minneapolis? Thanks again for the time.
Jude Bricker: Hey, Tom. There's not a lot of growth opportunities outside of Minneapolis, other than the stuff that we already have in the schedule like Texas origination down in Mexican Caribbean markets in the summertime. In the past, we've had a lot of success expanding our Midwest footprint into origination markets around Minneapolis. We also had a nice business in 2019 flying Hawaii. Hawaii is not a great place to be right now. So, with the yield environment, there's nothing that's obvious and urgent for us to move into. And so, I think what we're quite frankly, what we're going to be waiting on is some of our competitors to go through some challenging times and free up some opportunity for us. And that's why we want to think about having some powder on the balance sheet and just being able to be dynamic to be able to reallocate capacity when it presents itself, which I think is going to be an opportunity that's difficult to predict as we sit here today. The best thing for us in the near term is as we talked about cargo and charter opportunities.
David Davis: Yes. This is Dave. I just completely agree with what Jude just said. '25 for us is a year of integrating these new cargo aircraft, taking advantage of the economics of that new deal. And then, we'll look at the landscape in '26. There's growth opportunities -- there could be growth opportunities here, growth opportunities elsewhere, but we'll see what the landscape looks like in 2026 and beyond. I think given the state of some others, we expect it to be a different landscape than it looks like at this particular minute.
Operator: And does that conclude your questions, Mr. Fitzgerald?
Tom Fitzgerald: Yes. Thanks very much for the time, everyone.
Operator: One moment for our next question. We do have a follow-up from Scott Group from Wolfe. Your line is open.
Scott Group: Thanks for the follow-up. So just, I just want to make sure we're thinking about full year '25, right, just with the moving pieces. Can you just remind us how to think about how much-scheduled ASMs are going to be down? And then, what you think of a full year sort of block hours is per cargo?
David Davis: Yes. Let me sort of just describe it this way. Basically, we're going to be taking these cargo aircraft in and that is going to have sort of the first call on the resources that we have here, particularly on the pilot front. Then, as we have remaining resources available, we'll allocate that between scheduled service and charter, depending on where the opportunity is. Part of this depends on exactly where we sit from a pilot availability standpoint, frankly, going into 2025. Our current outlook is, likely to be down high single, low double-digits, on a block-hour basis or sorry on an ASM basis for scheduled service, but that could move left to right, depending on exactly where we sit from a pilot perspective. I think we had the block hour growth for cargo next year. Give me one second here… Yes, I don't have the '25 number right in front of me. We can follow-up with you on that, but it'll obviously be significant since we're bringing in eight new aircraft. But, the size of our scheduled service and charter business is going to be driven by resource availability, particularly pilots.
Scott Group: And any thoughts on what that mix shift should mean from a just total cost or unit cost perspective?
David Davis: Probably, a little premature to sort of talk about that, as to what's going to happen with CASM next year precisely. The cargo business is going to consume some of our resources here. There's going to be some additional allocation of overhead and other things to the cargo business. That mix just isn't sort of straightened out quite yet. Ultimately, yes. Sorry, just quickly. Yes, I think as we sit right now, we're expecting the cargo segment to be up, let's say, 60% to 63% in block hours in 2025 over 2024.
Scott Group: Ultimately, it doesn't sound like anything from what you guys laid out for us in June when you first made this announcement. It doesn't sound like anything is really changing.
David Davis: Nothing is really changing significantly. I'll tell you the only trend that we're seeing a little bit, is maybe a little bit of improved pilot availability, which would say maybe we could be a little bit bigger next year from a scheduled service perspective. On the call, I said down 10% to 12%, I think, in the scheduled service segment. Our latest numbers have is more like high single-digits. So, that's the number that's kind of moving left and right now, but the cargo delivery schedule of the aircraft they talked about on the last call is still relevant.
Jude Bricker: Importantly, you called out the seasonality of the growth is really beneficial for us. So, the first quarter will be intact and we'll see at least mid-single-digit growth January, February, March and then as we move into the year and start taking cargo airplanes, that's where we'll see a drawdown of our scheduled business.
Scott Group: Okay. Thank you, guys. Appreciate it.
Jude Bricker: Thanks, Scott.
David Davis: Thanks, Scott.
Operator: Thank you. And our next follow-up comes from Michael Linenberg from Deutsche Bank. Your line is open.
Michael Linenberg: Yeah. Hey. Thanks for the follow-up. But just a quick, as we think about composition of revenue, do we get to, like, 35% or 40% of your revenue is cargo and or charter for next year or am I just too high? Just trying to get a better sense.
David Davis: I think that number is probably not unrealistic for ‘26, but that sort of 35% plus number in -- 25 is not going to be that high.
Jude Bricker: I want to point out, block hours, we might get something like that towards the end of next year and going into the subsequent year, but the density of revenue is a lot higher in charter and scheduled service because of fuel pass through and some other costs too. So, the revenue per block hour is a lot lower in cargo just because of the way the accounting is treated for fuel expenses that we don't pay and things like that.
Michael Linenberg: Yeah. I'm just thinking about how that's going to impact your costs and also your fuel bill since, a big chunk of your business, it is going to be this pass through. Okay. No, that's helpful. Thank you.
Jude Bricker: Thanks, Mike.
Operator: Thank you. And I am showing no further questions in our phone lines. I'd now like to turn the conference back over to Jude Bricker for any closing remarks.
Jude Bricker: Thanks for your interest guys. Three big points, capacity growth has peaked and we feel that it's going to be a constructive fair environment, moving to the end of the year. Our blackout growth will continue, but we're going to shift into cargo predominantly. And we're really bullish on our free cash flow production as we have already acquired the growth for the next several years. And lastly, I'll end with just being so proud to be part of this team that executed so well through such challenging periods. This IT interruption the whole industry have to deal with was severe for our frontline employees and they executed beautifully. And I'm just so proud of them. Thanks, and we'll talk to you guys next quarter. Appreciate your interest.
Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
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