Draft Registration Statement
Table of Contents

As submitted confidentially to the Securities and Exchange Commission on December 19, 2019.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission, and all information herein remains strictly confidential.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SCA Acquisition Holdings, LLC

to be converted as described herein to a corporation named

Sun Country Airlines Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4512   82-4092570
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2005 Cargo Road

Minneapolis, MN 55450

(651) 681-3900

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Eric Levenhagen, Esq.

General Counsel and Secretary

2005 Cargo Road

Minneapolis, MN 55450

(651) 681-3900

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Brian M. Janson, Esq.
Paul, Weiss, Rifkind, Wharton &
Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064

(212) 373-3300

 

Eric Levenhagen, Esq.

General Counsel and Secretary

2005 Cargo Road

Minneapolis, MN 55450

(651) 681-3900

 

Michael Kaplan, Esq.

Derek Dostal, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of
Securities to be Registered
  Amount
to be
Registered
  Proposed
Maximum
Offering Price
Per Share
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(3)

Class A common stock, par value $0.01 per share

               

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes offering price of any additional shares that the underwriters have the option to purchase, if any. See “Underwriting.”

(3)

To be paid in connection with the initial filing of the registration statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

SCA Acquisition Holdings, LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the closing of this offering, SCA Acquisition Holdings, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Sun Country Airlines Holdings, Inc. as described in the section captioned “Corporate Conversion.” As a result of the Corporate Conversion, the common stockholders of SCA Acquisition Holdings, LLC will become holders of shares of Class A common stock of Sun Country Airlines Holdings, Inc. Except as disclosed in the prospectus included in this registration statement, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of SCA Acquisition Holdings, LLC and its subsidiaries and do not give effect to the Corporate Conversion. Shares of Class A common stock of Sun Country Airlines Holdings, Inc. are being offered by the prospectus included in this registration statement.

Pursuant to the applicable provisions of the Fixing America’s Surface Transportation Act, we are not required to file our consolidated financial statements (and related financial information) for the historical 2017 annual fiscal period or any interim fiscal period for 2018 or 2019 because we plan to file our consolidated financial statements (and related financial information) for the fiscal year ended December 31, 2019 in the first public filing of this registration statement. While the 2017 annual consolidated financial statements (and related financial information) and 2018 and 2019 interim consolidated financial statements (and related financial information) are otherwise required by Regulation S-X, we believe that they will not be required to be included in this registration statement at the time of the first public filing.


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated December 19, 2019

PROSPECTUS

Shares

 

LOGO

Sun Country Airlines Holdings, Inc.

Class A Common Stock

 

 

This is the initial public offering of Sun Country Airlines Holdings, Inc., a Delaware corporation. We are offering     shares of Class A common stock.

We expect the public offering price to be between $             and $             per share. Prior to this offering, no public market exists for the shares. We intend to apply to list our Class A common stock on             under the symbol “SNCY.”

Following the completion of this offering and related transactions, certain investment funds managed by affiliates of Apollo Global Management, Inc. will continue to own a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” under the corporate governance rules for             listed companies and will be exempt from certain corporate governance requirements of such rules. See “Risk Factors—Risks Related to this Offering and Ownership of our Class A Common Stock,” “Management—Controlled Company” and “Principal Stockholders.”

We are also an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and are eligible for reduced public company reporting requirements. Please see “Prospectus Summary—Implications of Being an Emerging Growth Company.”

By participating in this offering, you are representing that you are a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15). See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners.”

 

 

Investing in our Class A common stock involves risks that are described in the “Risk Factors” section beginning on page 21 of this prospectus.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds to us, before expenses

   $        $    

 

(1)

See “Underwriting” for additional information regarding the underwriters’ compensation and reimbursement of expenses.

The underwriters may also exercise their option to purchase up to an additional              shares from us at the public offering price, less underwriting discounts and commissions, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock against payment on or about            , 2020.

The date of this prospectus is             , 2020


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LOGO


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For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

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Prospectus Summary

     1  

Risk Factors

     21  

Cautionary Note Regarding Forward-Looking Statements

     54  

Use of Proceeds

     56  

Dividend Policy

     57  

Capitalization

     58  

Dilution

     59  

Selected Historical Consolidated Financial Data

     62  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     65  

Industry

     91  

Business

     93  

Management

     111  

Executive Compensation

     118  

Certain Relationships and Related Party Transactions

     130  

Principal Stockholders

     132  

Description of Capital Stock

     134  

Shares Eligible for Future Sale

     142  

Material U.S. Federal Income Tax Considerations

     144  

Underwriting

     148  

Legal Matters

     154  

Experts

     154  

Where You Can Find More Information

     154  

Index to Consolidated Financial Statements

     F-1  

We have not, and the underwriters have not, authorized any other person to provide you with any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. You should assume that the information appearing in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

Through and including             , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in the Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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TRADEMARKS, TRADE NAMES, AND SERVICE MARKS

We use various trademarks, trade names and service marks in our business, including “Sun Country,” “Sun Country Airlines,” “Sun Country Connections,” “Sun Country Rewards,” “Sun Country Vacations,” “Get To Going,” “The Hometown Airline” and “UFLY,” as well as our signature “S” logo. This prospectus contains references to our trademarks, trade names and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

INDUSTRY AND MARKET DATA

We include in this prospectus statements regarding factors that have impacted our and our customers’ industries. Such statements are statements of belief and are based on industry data and forecasts that we have obtained from industry publications and surveys, including those published by the United States Department of Transportation, as well as internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. In addition, while we believe that the industry information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus.

BASIS OF PRESENTATION

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” the “Issuer,” “Sun Country,” “we,” “us” and “our” refer, prior to the Corporate Conversion, to SCA Acquisition Holdings, LLC and its consolidated subsidiaries and, after the Corporate Conversion, to Sun Country Airlines Holdings, Inc. and its consolidated subsidiaries.

On April 11, 2018, MN Airlines, LLC (d/b/a Sun Country Airlines and now known as Sun Country, Inc.) was acquired by certain investment funds (the “Apollo Funds”) managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”). As a result of the change of control, the acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that our assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. Accordingly, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether they relate to the period preceding the acquisition or the period succeeding the acquisition, respectively. Due to the change in the basis of accounting resulting from the acquisition, the consolidated financial statements for the Predecessor and Successor periods, included elsewhere in this prospectus, are not necessarily comparable.

All consolidated financial statements presented in this prospectus have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

 

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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” For definitions of certain industry terms used in this prospectus, see “—Glossary of Terms” beginning on page 18.

Overview

Sun Country Airlines is a Minnesota-based high-growth, low-cost air carrier focused on serving leisure passengers on flights throughout the United States and to destinations in Mexico, Central America, the Caribbean and Canada. Sun Country Airlines represents a new breed of hybrid carrier. We operate an agile network consisting of our core scheduled service business and our synergistic and profitable charter business. Our unique model dynamically deploys shared aircraft and flight crews across our service lines to generate superior returns and high margins. We optimize capacity allocation by market, time of year, day of week and line of business by shifting flying to markets during periods of high demand and away from markets during periods of low demand with far greater frequency than other airlines. The only carrier in the United States that flies a similar flexible network to us is Allegiant Travel Company, but Allegiant flies to different markets than we do with a basic product, smaller charter business and limited ticket distribution network through its website. Our model includes many of the low-cost structure characteristics of ultra low-cost carriers, or ULCCs (which include Allegiant Travel Company, Spirit Airlines and Frontier Airlines), such as an unbundled product, 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 an elevated product that we believe is superior to the ULCCs and consistent with that of low-cost carriers, or LCCs (which include Southwest Airlines and JetBlue Airways). For example, our product includes more legroom, free beverages, in-flight entertainment and in-seat power, none of which are offered by the ULCCs. The combination of our agile “peak demand” network with our elevated consumer product allows us to generate higher total revenue per available seat mile, or TRASM, than ULCCs while maintaining lower cost per available seat mile, or CASM, excluding fuel than LCCs.

In April 2018, we were acquired by the Apollo Funds. Since the acquisition, we have transformed our business under a new management team of seasoned professionals who have a strong combination of low-cost and legacy network airline experience. We have redesigned our network to focus our flying on peak demand opportunities at both our Minneapolis/St. Paul, or MSP, hub and our growing network of non-MSP point-to-point markets, which has supported a         % increase in passengers from 2017 to 2019. We have greatly expanded our ancillary products and services, increasing average ancillary revenue per scheduled service passenger by over         % from 2017 to 2019. Since 2017, management has taken actions to reduce our cost basis by approximately $34 million on an annual basis, contributing to a reduction in CASM excluding fuel of over         % between 2017 and 2019. We have invested over $115 million in new aircraft, new interiors, IT systems and other growth-oriented capital expenditure projects since the beginning of 2017. In June 2019, we introduced a new website and replaced our reservation and distribution system with the Navitaire system, which has lowered our selling costs, increased the proportion of our bookings that are made directly through our website and simplified the process of buying tickets and changing flight details post-purchase. We believe that these investments have positioned us to profitably grow our business in the long term and that our period of heavy investment in transformative capital spending is behind us for the foreseeable future.

Our network transformation has focused on increasing routes flown while allocating our assets to the most profitable lines of flying. We concentrate scheduled service trips during the highest yielding months of the year



 

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and days of the week, and we allocate aircraft to charter service when it is more profitable to do so. As a result, in 2019 only         % of our routes were daily year-round, compared to an average of         % among mainline U.S. passenger airlines. Although this scheduling approach produces lower fleet utilization than most of our peers, it generates significantly higher TRASM. In addition to network changes, we have invested in new aircraft interiors, including the removal of a legacy first class section and the replacement of older seats on all of our 737-800 aircraft with new comfortable, full-recline seats. We have increased the average seat count on our 737-800s from 162 to 186 while still offering an average pitch, defined as the distance from the back of a seat to the back of the seat directly in front of it, of 31 inches, which is comparable legroom to Southwest Airlines and greater legroom than all of our ULCC competitors. We have also installed in-seat power and provide complimentary in-flight entertainment streamed to passengers’ devices, features that are comparable to those offered by our LCC competitors and that are not offered by any of our ULCC competitors, providing our passengers with a preferred onboard experience. As part of our transformation, we have greatly increased our level of ancillary product sales, which consist of baggage fees, seat assignment fees and other fees. Our dynamic scheduling strategy, preferred product and focus on ancillary revenue generation have allowed us to produce unit revenue, as measured by TRASM, of              cents for the year ended December 31, 2019, which is comparable to LCCs and higher than ULCCs.

Our business transformation has also focused heavily on unit cost reduction. We have achieved cost savings by renegotiating certain key contracts and agreements, outsourcing certain functions to third-party service providers, reducing the cost of our fleet through more efficient aircraft sourcing and financing, staffing efficiencies and other cost-saving initiatives. As a result of these savings and the seat densification of our aircraft, our CASM excluding fuel has decreased from 7.79 cents for the year ended December 31, 2017 to          cents for the year ended December 31, 2019. Our CASM excluding fuel is comparable to ULCCs and lower than LCCs despite us flying a lower utilization network. We believe that we are well-positioned to continue reducing our unit costs as we grow through ongoing strategic initiatives and realize greater economies of scale. In addition, low cost, leisure focused business models similar to ours have been more resilient during economic downturns compared to business models adopted by legacy carriers.

Our transformation has resulted in rapid growth and significant improvements to our financial results. From 2017 to 2019, our average fleet count has increased from 23.4 to          aircraft, our available seat miles have increased by approximately         % and our revenue has increased by approximately         %. In 2019, our total revenue was approximately $         million, our net income was approximately $         million, our Adjusted Net Income was approximately $         million, our Adjusted EBITDAR was approximately $         million and we had positive free cash flow, which we define as operating cash flow minus capital expenditures.

Our New Contract with Amazon

On December 13, 2019, we signed a six-year contract (with two, two-year extension options, for a maximum term of 10 years) with Amazon.com Services, Inc. (together with its affiliates, “Amazon”) to provide them with air cargo services (the “ATSA”). Flying under the ATSA is expected to begin in the second quarter of 2020 and be fully ramped up by the fourth quarter of 2020, at which point Amazon will have up to 10 Boeing 737-800 cargo aircraft flown by Sun Country.

Our Competitive Strengths

We believe that the following key strengths allow us to compete successfully within the U.S. airline industry.

Agile “Peak Demand” Scheduling Strategy. We flex our capacity by day of the week, month of the year and line of business to capture what we believe are the most profitable flying opportunities available from both our MSP home market and our growing network of non-MSP markets. As a result, our route network varies widely throughout the year. For the year ended December 31, 2019, we flew approximately         % more of our



 

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capacity during our top 100 peak demand days of the year as compared to the remaining days of the year. For 2019, our average fare was approximately         % higher on our top 100 peak demand days as compared to the remaining days of the year. In 2019, only         % of our routes were daily year round, compared to         % for Frontier Airlines,         % for Allegiant Travel Company,         % for Spirit Airlines and         % for Southwest Airlines. The following charts demonstrate that our schedule is highly variable by day of week and month of the year.

 

LOGO

 

LOGO

In addition to shifting aircraft across our network by season and day of week, we also shift between our scheduled service and charter businesses to maximize the return on our assets. We regularly schedule our fleet using what we refer to as “Power Patterns,” which involves scheduling aircraft and crew on trips that combine scheduled service and charter legs, dynamically replacing what would be lower margin scheduled service with charter opportunities. Our agility is supported by our variable cost structure and the cross utilization of our people and assets between lines of business. We believe that the synergies to be gained from cross utilization will



 

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increase when we begin servicing the Amazon cargo business in the second quarter of 2020 because our pilots will interchangeably be scheduled between scheduled service, charter and cargo flights. Our agile peak demand strategy allows us to generate higher TRASM by focusing on days with stronger demand.

Tactical Mid-Life Fleet with Flexible Operations. We maintain low aircraft ownership costs by purchasing mid-life Boeing 737-800 aircraft, which have a lower purchase price than comparable new Boeing 737 aircraft. Lower ownership costs allow us to maintain lower unit costs at lower levels of utilization. This allows us to concentrate our flying during periods of peak demand, which generates higher TRASM. In 2019, we flew our aircraft an average of          hours per day, which is the lowest among major U.S. airlines other than Allegiant Travel Company, which flies a similar low utilization model, albeit serving smaller markets. Our single family aircraft fleet also has operational and cost advantages, such as allowing for optimization of crew scheduling and training and lower maintenance costs. Our fleet is highly reliable and we have a demonstrated ability to maintain our high completion factor during harsh weather conditions. For the twelve months ended September 30, 2019, we had a completion factor of 99.8% across our system, which is higher than ULCCs or LCCs, despite our cold weather Minneapolis home base.

Superior Low-Cost Product and Brand. We have invested in numerous projects to create a well-regarded product and brand that we believe is superior to ULCCs while maintaining lower fares than LCCs and larger full service carriers. Some of the reasons that we believe we have a superior brand include:

Our Cabin Experience. We have replaced all of our 737-800 seats with new state-of-the art seats that fully recline and have full size tray tables. Our new seats have an average pitch of 31 inches, giving our customers comparable legroom to Southwest Airlines and greater legroom than all ULCCs in the United States. We also added seat-back power, complimentary in-flight entertainment and free beverages to improve the overall flying experience for our customers. Such amenities are comparable to those offered on our LCC competitors and are not available on any ULCCs in the United States.

Our Digital Experience. We have significantly improved the buying experience for our customers. We overhauled our passenger service system and transitioned to Navitaire, the premier passenger service system in the United States. Navitaire has decreased our overall website session length, decreased mobile bounce and increased our overall conversion rate. The transition to Navitaire has been one of our most important initiatives, improving the Sun Country customer experience, making our website booking more seamless, allowing us to create a large customer database and supporting ancillary revenue growth.

In addition to our product, we believe that our brand is well recognized and well regarded in the markets that we serve. Based on a management study conducted in the fourth quarter of 2019, respondents that had a preference said they would rather fly Sun Country Airlines than Allegiant Travel Company by a margin of 79% to 21%, would rather fly Sun Country Airlines than Frontier Airlines by a margin of 77% to 23% and would rather fly Sun Country Airlines than Spirit Airlines by a margin of 81% to 19%.

Competitive Low Cost Structure. Our transformation initiatives have reduced our unit costs significantly and have positioned us well for future growth. Since 2017, management has taken actions to reduce our cost basis by approximately $34 million on an annual basis and has initiatives in place to generate an additional $10 million of cost savings going forward. Our completed and ongoing cost savings efforts include the outsourcing of Minneapolis station handling, renegotiation of our component maintenance agreement, fuel savings initiatives, catering cost reductions, renegotiation of distribution contracts and various other initiatives. Our CASM excluding fuel has declined from 7.79 cents for the year ended December 31, 2017 to          cents for the year ended December 31, 2019. We are also focused on continuous cost rationalization and identifying potential redundancies or inefficiencies in our operations. We believe that our unique business model and strategy positions us well to maintain and improve our CASM despite having lower utilization rates than most of our peers.



 

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Strong Position in Our Profitable MSP Home Market. We have been based in the Minneapolis-St. Paul area since our founding over 35 years ago, where our brand is well-known and well-liked. We are the largest low-cost carrier at MSP, which is our largest base, and the second largest airline based on ASMs after Delta Air Lines, which primarily serves business and connecting traffic customers, while we primarily serve leisure customers. Excluding Delta Air Lines, we have nearly twice the capacity, as measured by ASMs, of any other competitor at MSP. However, our seat share at MSP is still meaningfully lower than Spirit Airline’s seat share in Fort Lauderdale and Frontier Airline’s seat share in Denver, and we believe there is significant room for us to grow in MSP through further market stimulation. We fly out of Terminal 2, which we believe is preferred by many flyers because of its smaller layout, shorter security wait times, close parking relative to check-in and full suite of retail shops. We currently utilize 8 of the 14 gates in Terminal 2. As a result of our focus on flying during seasonal peak periods, our well regarded brand and product and our strong position in Minneapolis, we enjoy a TRASM premium at MSP. We believe MSP is among the most profitable LCC bases in the United States and we believe we generate higher TRASM in MSP than any ULCC in the United States in its primary base.

Synergistic and Profitable Charter Business. From 2017 through 2019, we have grown our charter revenue by approximately         % while providing charter services to over 275 destinations in 25 countries across the world. Our charter business has several favorable dynamics including a large repeat customer base, stable demand and the ability to pass through certain costs, including fuel. Our diverse charter customer base includes casino operators, the U.S. Department of Defense, college sports teams and professional sports teams. We are the primary air carrier for the NCAA Division I National Basketball Tournament (known as “March Madness”) and we flew over 100 college sports teams during 2019. Our charter business includes ad hoc, repeat, short-term and long-term service contracts (with pass through fuel arrangements and annual rate escalation) and most of our business is non-cyclical as the U.S. Department of Defense and sports teams still fly during economic downturns and our casino contracts are long-term in nature. Additionally, our stable and growing charter business complements seasonal and day-of-week focused scheduled passenger service by allowing us to optimize our aircraft scheduling and crew to the most profitable flying opportunities. In general, charter available seat miles are high in fall months when scheduled service operations are less favorable.

Seasoned Management Team. As part of our transformation, we recruited a seasoned management team with decades of experience in aviation at some of the largest and most successful airlines in the world. Our Chief Executive Officer, Jude Bricker, joined Sun Country Airlines in 2017 and has over 15 years of experience in the aviation industry, including serving as the Chief Operating Officer of Allegiant Travel Company from 2015 to 2017, at which point it was a public company. Our President and Chief Financial Officer, Dave Davis, joined Sun Country in 2018 and has over 20 years of experience in the aviation industry, including previously serving as the Chief Financial Officer at Northwest Airlines and US Airways, which were both public companies. Other members of our management team have worked at airlines such as American Airlines, Delta Air Lines, Northwest Airlines and US Airways.

Our Growth Strategy

Over the past two years, we have transformed our business to establish the infrastructure to support significant profitable growth going forward. Our main initiatives have included:

 

   

Network. We launched          new markets and developed a repeatable network growth strategy. Our network strategy is expected to support passenger fleet growth to approximately 50 aircraft by the end of 2023.

 

   

Fleet. We restructured our fleet with a focus on ownership of Boeing 737-800s with no planned lease redeliveries prior to 2024, allowing us to focus on growth with low capital commitments.



 

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Customer. We rebranded the airline around a leisure product with a significant ancillary revenue component. With the product transition complete, we can focus on stimulating demand in current and new markets and delivering a high quality travel experience.

 

   

Culture. We installed a new management team with a cost-conscious ethos, which included moving our headquarters into a hangar at MSP.

 

   

Operations. Through our transformation, we have maintained high standards of operational performance, including a 99.8% completion factor for the twelve months ended September 30, 2019.

We believe our initiatives have provided us with a unique platform to continue to profitably grow our business. Key elements of our growth strategy include:

Expand our “Peak Demand” Flying in Minneapolis and Beyond. We intend to continue to grow our network profitably both from MSP and on new routes outside of MSP by focusing on seasonal markets and day of the week flying during periods of peak demand. We have expanded our network from 46 routes in 2017 to 98 routes currently planned for 2020, including expanding our routes that neither originate nor terminate in MSP from 5 routes in 2017 to 42 routes planned for 2020. We have expanded our operations aggressively in recent years, in part because we are able to efficiently redeploy assets. Furthermore, the reduction in our unit costs has expanded the number of markets that we can profitably serve. We have identified over 250 new market opportunities. We have a successful history of opening and closing stations to meet seasonal demand. Our future network plans include growing our network at our hub in Minneapolis to full potential, including adding frequencies on routes we already serve and adding new routes to leverage our large, loyal customer base in the area. Our long term strategic plans have identified potential growth opportunities at MSP alone of 10 to 12 aircraft by the end of 2023.

We have also been rapidly growing, and will continue to grow, outside of MSP. Our customer friendly low fares have been well received in the upper Midwest and in large, fragmented markets elsewhere that we can profitably serve on a seasonal and/or day-of-week basis. Our upper Midwest growth is focused on cold to warm weather leisure routes from markets similar to Minneapolis, such as Madison, Wisconsin. Additionally, we have been adding capacity on large leisure trunk routes on a seasonal basis during periods when demand is high. Examples of such routes include Los Angeles to Honolulu and Dallas to Mexican beach destinations during the summer months. Our business model is ideally suited to seasonally serve these routes, which are highly profitable because fares are elevated during the months in which we fly them. Our long term strategic plans have identified potential growth opportunities outside of MSP of 5 to 8 aircraft, as well as an additional 3 to 4 aircraft to support our charter operations, in each case, by the end of 2023.

Continue to Increase Our Margins and Free Cash Flows. Since December 31, 2017, we have reduced our CASM excluding fuel from 7.79 cents to          cents, a level comparable to ULCCs. When combined with our TRASM, which remains comparable to LCCs and higher than ULCCs, we generate highly competitive margins. Since 2017, management has taken actions to reduce our cost basis by approximately $34 million on an annual basis and has initiatives in place to generate an additional $10 million of cost savings going forward. Our completed and ongoing cost savings initiatives include outsourcing of Minneapolis station handling, reworking of spare parts agreements, fuel savings initiatives, catering cost reductions, renegotiation of distribution contracts and various other initiatives. Our period of heavy investment in fleet renewal and transformative capital expenditures is largely behind us. As a result, we expect improvements in profit margins and free cash flow to support growth in the years ahead.

Grow Our New Amazon Business. On December 13, 2019, we signed a new six-year contract (with two, two-year extension options, for a maximum term of 10 years) with Amazon to provide air cargo transportation services with agreed pricing. Amazon will supply the aircraft and bear directly or reimburse us for certain operating expenses, including fuel and heavy maintenance. The aircraft will fly under our air carrier operating certificate and we will supply the crew, maintenance and insurance for the aircraft, all expenses that are well understood by us. Amazon has agreed to pay a fixed monthly fee per aircraft as well as a set rate per block hour



 

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flown. Flying is expected to begin in the second quarter of 2020 and be fully ramped up by the fourth quarter of 2020, at which point we will operate 10 cargo aircraft under the ATSA. We also expect that the Amazon operations will complement our core scheduled passenger business.

Our Route Network

During 2019, we served             airports throughout the United States, Mexico, Central America and the Caribbean. The map below represents our current network, including routes currently flown and offered for sale.

 

LOGO

Risk Factors

Participating in this offering involves substantial risk. Our ability to execute our strategy also is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our competitive strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges and risks we face include the following:

 

   

changes in economic conditions;

 

   

the price and availability of aircraft fuel and our ability to control other costs;

 

   

threatened or actual terrorist attacks or security concerns;

 

   

the ability to operate in an exceedingly competitive industry;

 

   

factors beyond our control, including air traffic congestion, adverse weather, federal government shutdowns, aircraft-type groundings or increased security measures;

 

   

the ability to realize the anticipated strategic and financial benefits of the ATSA with Amazon;

 

   

any restrictions on or increased taxes applicable to charges for ancillary products and services; or

 

   

our concentration in the Minneapolis-St. Paul market.



 

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Our Relationship with Apollo

Founded in 1990, Apollo is a leading global alternative investment manager with offices in New York, Los Angeles, San Diego, Houston, Bethesda, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong, Shanghai and Tokyo. Apollo had assets under management of approximately $323 billion as of September 30, 2019 in credit, private equity and real assets funds invested across a core group of nine industries where Apollo has considerable knowledge and resources.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act,” enacted in April 2012. As an “emerging growth company,” we may take advantage of specified reduced reporting and other requirements that are otherwise applicable to public companies. These provisions include, among other things:

 

   

exemption from the auditor attestation requirement in the assessment on the effectiveness of our internal control over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (United States), requiring mandatory audit firm rotation or a supplement to our auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” if we have $1.07 billion or more in total annual gross revenues during our most recently completed fiscal year, if we become a “large accelerated filer” with a market capitalization of $700 million or more, or as of any date on which we have issued more than $1.0 billion in non-convertible debt over the three-year period to such date.

We may choose to take advantage of some, but not all, of these reduced burdens. For example, we have taken advantage of the reduced reporting requirement with respect to disclosure regarding our executive compensation arrangements and expect to take advantage of the exemption from the auditor attestation requirement in the assessment on the effectiveness of our internal control over financial reporting. In addition, while we have elected to avail ourselves of the exemption to adopt new or revised accounting standards until those standards apply to private companies, we are permitted and have elected to early adopt certain new or revised accounting standards for which the respective standard allows for early adoption. See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided by other public companies.

In addition, upon the closing of this offering, we will be a “controlled company” within the meaning of the              corporate governance standards because more than 50% of the voting power of our outstanding common stock will be owned by the Apollo Funds. For further information on the implications of this distinction, see “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock” and “Management—Controlled Company.”



 

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Corporate Conversion

We currently operate as a Delaware limited liability company under the name SCA Acquisition Holdings, LLC. Prior to the closing of this offering, SCA Acquisition Holdings, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Sun Country Airlines Holdings, Inc. In this prospectus, we refer to all of the transactions related to our conversion to a corporation described above as the Corporate Conversion.

In connection with the Corporate Conversion, all of the outstanding equity interests of SCA Acquisition Holdings, LLC, which historically are denominated as shares of common stock that we refer to as “SCA common stock,” will be converted into an aggregate of          shares of our Class A common stock, all of the outstanding warrants to purchase shares of SCA common stock will be converted into warrants to purchase an aggregate of          shares of our Class A common stock and all of the outstanding options to purchase shares of SCA common stock will be converted into options to purchase an aggregate of          shares of Class A common stock, with exercise prices for the warrants and options appropriately adjusted. In addition, we will issue one share of Class B common stock to one of the Apollo Funds. The holder of our one share of Class B common stock will be entitled to a number of votes equal to the number of shares of Class A common stock issuable upon the full exercise of the outstanding Apollo Warrants at such time. See “Description of Capital Stock.”

In connection with the Corporate Conversion, Sun Country Airlines Holdings, Inc. will continue to hold all property and assets of SCA Acquisition Holdings, LLC and will assume all of the debts and obligations of SCA Acquisition Holdings, LLC. Sun Country Airlines Holdings, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described in the section captioned “Description of Capital Stock.” On the effective date of the Corporate Conversion, the members of the board of directors of SCA Acquisition Holdings, LLC will become the members of the board of directors of Sun Country Airlines Holdings, Inc., and the officers of SCA Acquisition Holdings, LLC will become the officers of Sun Country Airlines Holdings, Inc.

Corporate Information

We were organized under the laws of the State of Delaware as a limited liability company on December 8, 2017 and will be converted to a corporation under the laws of the state of Delaware prior to closing of this offering as part of the Corporate Conversion. Our principal executive offices are located at 2005 Cargo Road, Minneapolis, MN 55450. Our telephone number is (651) 681-3900. Our website is located at https://www.suncountry.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our Class A common stock.



 

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The Offering

By participating in this offering, you are representing that you are a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15). See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners.”

 

Issuer

   Sun Country Airlines Holdings, Inc.

Class A common stock offered by us

  

 

                     shares (or                      shares if the underwriters exercise their option to purchase additional shares in full as described below).

Option to purchase additional shares

  

 

We have granted the underwriters an option to purchase up to an additional              shares from us. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting.”

Class A common stock outstanding after giving effect to this offering

  

 

                     shares (or                     shares if the underwriters exercise their option to purchase additional shares in full).

Votes per share of Class A common stock

   One vote per share.

Total voting power of Class A common stock outstanding after giving effect to this offering

               %.

Class B common stock outstanding after giving effect to this offering

   One share.

Votes per share of Class B common stock

  

 

Upon completion of this offering,             votes, which is equivalent to the number of shares of Class A common stock issuable upon the full exercise of the outstanding Apollo Warrants at such time. The amount of votes per share of Class B common stock will decrease as the Apollo Warrants are exercised. See “Description of Capital Stock—Common Stock.”

Total voting power of Class B common stock outstanding after giving effect to this offering

               %.

Apollo Warrants to purchase Class A common stock outstanding after giving effect to this offering

  

 

 

The Apollo Funds will own warrants to purchase an aggregate of                      shares of Class A common stock at an exercise price of $0.01 per share, which amount excludes warrants to purchase                      shares of Class A common stock that will be exercised in connection with this offering. See “Description of Capital Stock—Warrants—Apollo Warrants.”



 

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2019 Warrants to purchase Class A common stock outstanding after giving effect to this offering

  

 

Amazon will own warrants to purchase an aggregate of                      shares of Class A common stock at an exercise price of $         per share, approximately     % of which have vested. See “Description of Capital Stock—Warrants—2019 Warrants.”

Use of proceeds

  

We estimate that our net proceeds from this offering will be approximately $         million (or approximately $          million if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and commissions, based on an assumed initial offering price of $          per share (the midpoint of the range set forth on the cover page of this prospectus).

 

We currently expect to use approximately $         million of the proceeds from this offering to pay fees and expenses in connection with this offering, which include legal and accounting fees, SEC and FINRA registration fees, printing expenses, and other similar fees and expenses. We intend to use any remaining proceeds for general corporate purposes. See “Use of Proceeds” for additional information.

Controlled company

   Upon completion of this offering, the Apollo Funds will continue to beneficially own more than 50% of the voting power of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under the rules of         , including exemptions from certain of the corporate governance listing requirements. See “Management—Controlled Company.”

Dividend policy

   We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. However, we may, in the future, decide to pay dividends on our Class A common stock. Any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, and any other factors deemed relevant by our board of directors. See “Dividend Policy.”

Listing

   We intend to apply to list our Class A common stock on the             under the symbol “SNCY.”

Risk Factors

   You should read the section titled “Risk Factors” beginning on page 21 of, and the other information included in, this prospectus for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our Class A common stock.

Except as otherwise indicated, all of the information in this prospectus:

 

   

assumes the completion of the Corporation Conversion;

 

   

assumes an initial public offering price of $         per share of Class A common stock, the midpoint of the range set forth on the cover page of this prospectus;



 

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assumes no exercise of the underwriters’ option to purchase up to                     additional shares of Class A common stock in this offering;

 

   

assumes the exercise of outstanding Apollo Warrants for                     shares of Class A common stock in connection with this offering. Following this offering, Apollo Warrants to purchase an aggregate of          shares of Class A common stock will remain outstanding. The exercise of the Apollo Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners”;

 

   

assumes no exercise of the 2019 Warrants to purchase an aggregate of                      shares of Class A common stock, approximately     % of which have vested. As is the case for investment in our company generally, the exercise of the 2019 Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners”;

 

   

does not reflect an additional                     shares of Class A common stock reserved for future grant under our new equity incentive plan (the “Omnibus Equity Plan”). See “Executive Compensation—Equity Compensation Plans—2020 Omnibus Incentive Plan”; and

 

   

does not reflect     shares of Class A common stock that may be issued upon the exercise of stock options outstanding as of the consummation of this offering under the SCA Acquisition Holdings, LLC Equity Incentive Plan (the “SCA Acquisition Equity Plan”). The following table sets forth the outstanding stock options under the SCA Acquisition Equity Plan as of December 31, 2019 (assuming the completion of the Corporate Conversion):

 

                                                                 
     Number of
Options(1)
     Weighted-Average
Exercise Price
Per Share
 

Vested stock options (time-based vesting)

                                   $                            

Unvested stock options (time-based vesting)

      $    

Unvested stock options (performance-based vesting)

      $    

 

 

(1)

Upon a holder’s exercise of one option, we will issue to the holder one share of Class A common stock.



 

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Summary Consolidated Financial and Operating Information

The following tables present our summary consolidated financial and operating information for the periods indicated. We have derived the summary historical consolidated statement of operations data for the year ended December 31, 2019 and for the periods January 1, 2018 through April 10, 2018 (Predecessor) and April 11, 2018 through December 31, 2018 (Successor) from our audited consolidated financial statements included elsewhere in this prospectus. We have derived our summary historical consolidated balance sheet data as of December 31, 2019 from our audited consolidated financial statements included elsewhere in this prospectus.

Our combined statement of operations data for the year ended December 31, 2018, which we refer to as the Combined 2018 period, represent the mathematical addition of the Predecessor period from January 1, 2018 through April 10, 2018 and the Successor period from April 11, 2018 to December 31, 2018. This combination does not comply with GAAP, but is presented because our core operations continued throughout 2018 and we believe it provides the most meaningful comparison of our results. This combined data is presented for supplemental purposes only and (1) may not reflect the actual results we would have achieved absent the acquisition, (2) may not be predictive of future results of operations and (3) should not be viewed as a substitute for the financial results of the Successor and Predecessor presented in accordance with GAAP. The significant differences in accounting for the Successor period as compared to the Predecessor period, which were established as part of our acquisition by the Apollo Funds, are in (1) aircraft rent, due to the over-market liabilities related to unfavorable terms of our existing aircraft leases and maintenance reserve payments, which will be amortized on a straight-line basis as a reduction of aircraft rent over the remaining life of each lease, (2) maintenance expenses, due to recognizing a liability (or contra-asset) that will offset expenses for maintenance events incurred by the Successor but paid for by the Predecessor and (3) depreciation and amortization, due to the recognition of our property and equipment and other intangible assets at fair value at the time of the acquisition, which will be amortized through depreciation and amortization on a straight-line basis over their respective useful lives. The following summary consolidated financial and operating information should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Successor      Successor           Predecessor      Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
          For the period
January 1, 2018
through

April 10, 2018
     For the year
ended

December 31,
2018
 
(in thousands, except per share data)                                 

Statement of Operations Data:

               

Operating Revenues:

               

Passenger

   $                    $ 335,824          $ 172,897      $ 508,721  

Other

        49,107            24,555        73,662  
  

 

 

    

 

 

        

 

 

    

 

 

 

Total Operating Revenue

        384,931            197,452        582,383  
  

 

 

    

 

 

        

 

 

    

 

 

 

Operating Expenses:

               

Aircraft Fuel

        119,553            45,790        165,343  

Salaries, Wages, and Benefits

        90,263            36,964        127,227  

Aircraft Rent(1)

        36,831            28,329        65,160  

Maintenance(2)

        15,491            9,508        24,999  

Sales and Marketing

        17,180            10,854        28,034  

Depreciation and Amortization(3)

        14,405            2,526        16,931  

Ground Handling

        23,828            8,619        32,447  

Landing Fees and Airport Rent

                         25,977            10,481        36,458  


 

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     Successor      Successor           Predecessor     Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
          For the period
January 1, 2018
through

April 10, 2018
    For the year
ended

December 31,
2018
 
(in thousands, except per share data)                                

Special Items, net

   $                    $ (6,706        $ 271     $ (6,435

Other Operating, net

                         40,877            17,994       58,871  
  

 

 

    

 

 

        

 

 

   

 

 

 

Total Operating Expenses

        377,699            171,336       549,035  
  

 

 

    

 

 

        

 

 

   

 

 

 

Operating Income

        7,232            26,116       33,348  
  

 

 

    

 

 

        

 

 

   

 

 

 

Non-operating Income (Expense):

              

Interest Income

        258            96       354  

Interest Expense

        (6,060          (339     (6,399

Other, net

        (1,636          37       (1,599
  

 

 

    

 

 

        

 

 

   

 

 

 

Total Non-operating Expense

        (7,438          (206     (7,644
 

Income (Loss) before Income Tax

        (206          25,910       25,704  
  

 

 

    

 

 

        

 

 

   

 

 

 

Income Tax Expense

        161            —         161  
  

 

 

    

 

 

        

 

 

   

 

 

 

Net Income (Loss)

   $                    $ (367        $ 25,910     $ 25,543  
  

 

 

    

 

 

        

 

 

   

 

 

 

Net Income (Loss) per share to common stockholders:

              

Basic and diluted

   $        $ (0.15        $ 0.26    
  

 

 

    

 

 

        

 

 

   

Weighted average shares outstanding:

              

Basic and diluted

        2,472            100,000    
 

Pro forma Net Income (Loss) per share to common stockholders(4):

              

Basic and diluted

              

Pro forma weighted average shares outstanding:

              

Basic and diluted

              

 

(1)

Aircraft Rent expense for the Successor period is reduced due to amortization of a liability representing lease rates and maintenance reserves which were higher than market terms of similar leases at the time of our acquisition by the Apollo Funds. This liability was recognized at the time of the acquisition and is being amortized into earnings through a reduction of Aircraft Rent on a straight-line basis over the remaining life of each lease. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(2)

Maintenance expense for the Successor period is reduced due to recognizing a liability (or contra-asset) to represent the Successor’s obligation to perform planned maintenance events paid for by the Predecessor on leased aircraft at the date of our acquisition by the Apollo Funds. The liability (or contra-asset) is recognized as a reduction to Maintenance expense as reimbursable maintenance events are performed and maintenance expense is incurred. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(3)

Depreciation and amortization expense increased in the Successor period due to higher fair values for certain acquired assets and to the amortization of definite-lived intangible assets. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.



 

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(4)

See Note 4 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted pro forma net income (loss) per share to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

 

     As of December 31, 2019  
     Actual      Pro
forma(1)
     Pro forma
as
adjusted(2)
 

(in thousands)

 

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $                    $                    $                

Total assets

        

Long-term debt and finance leases, including current portion

        

Total stockholders’ (deficit) equity

        

 

(1)

The pro forma consolidated balance sheet data gives effect to: (i) the Corporate Conversion and the filing and effectiveness of our certificate of incorporation, which will be in effect immediately prior to the completion of this offering, and (ii) the exercise of          outstanding Apollo Warrants for          shares of Class A common stock in connection with this offering. Following this offering, Apollo Warrants to purchase an aggregate of          shares of Class A common stock will remain outstanding and 2019 Warrants to purchase an aggregate of          shares of Class A common stock, approximately     % of which have vested, will remain outstanding. As is the case for investment in our company generally, the exercise of the Apollo Warrants and 2019 Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners.”

(2)

The pro forma as adjusted balance sheet data gives further effect to this offering and the application of the net proceeds of this offering as of December 31, 2019 as described under “Use of Proceeds.”

 

     Successor      Successor           Predecessor      Combined 2018  
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31, 2018
          For the period
January 1, 2018
through

April 10, 2018
     For the year
ended

December 31,
2018
 

(in thousands)

               

Non-GAAP Financial Data:

               

Adjusted Net Income(1)

   $                        $ (5,871        $ 26,181      $ 20,310  

Adjusted EBITDAR(1)

                    49,688                    57,279                106,967  

 

(1)

Adjusted Net Income and Adjusted EBITDAR are non-GAAP measures and are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of net income and EBITDAR 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 Net Income and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: Adjusted Net Income and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; Adjusted EBITDAR does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; Adjusted EBITDAR does not reflect changes in, or cash requirements for, our working capital needs; Adjusted Net Income and Adjusted EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDAR does not reflect any cash requirements for such replacements; and other companies in our industry may calculate Adjusted Net Income and Adjusted EBITDAR differently than we do, limiting each measure’s usefulness as a comparative measure. Because of these limitations Adjusted Net Income and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Further, we believe Adjusted EBITDAR is useful in evaluating our operating performance compared to our competitors because its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by finance lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different companies for reasons unrelated to overall operating performance. However, because derivations of Adjusted Net Income and Adjusted EBITDAR are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the



 

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measures in the same manner. As a result, derivations of net income, including Adjusted Net Income and Adjusted EBITDAR, as presented may not be directly comparable to similarly titled measures presented by other companies. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance since it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted Net Income and Adjusted EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

The following table presents the reconciliation of Net Income to Adjusted Net Income for the periods presented below.

 

     Successor      Successor           Predecessor      Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
          For the period
January 1, 2018
through

April 10, 2018
     For the year
ended

December 31,
2018
 

(in thousands)

               

Adjusted Net Income reconciliation:

               

Net income

   $                    $ (367        $ 25,910      $ 25,543  

Special items, net(a)

        (6,706          271        (6,435

Gain on asset transactions, net

        (811          —          (811

Stock compensation expense

        373            —          373  

Income tax effect of adjusting items, net(b)

        1,640            —          1,640  
  

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted Net Income

   $        $ (5,871        $ 26,181      $ 20,310  
  

 

 

    

 

 

        

 

 

    

 

 

 

 

(a)

See Note 14 to our audited consolidated financial statements included elsewhere in this prospectus for additional information on the components of special items, net.

(b)

The tax effect of adjusting items, net is calculated at the Company’s statutory rate for the applicable period.

The following table presents the reconciliation of Net Income to Adjusted EBITDAR for the periods presented below.

 

     Successor      Successor           Predecessor     Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
          For the period
January 1,
2018 through

April 10, 2018
    For the year
ended

December 31,
2018
 

(in thousands)

              

Adjusted EBITDAR reconciliation:

              

Net income

   $                    $ (367        $ 25,910     $ 25,543  

Special items, net

        (6,706          271       (6,435

Interest expense

        6,060            339       6,399  

Gain on asset transactions, net

        (811          —         (811

Stock compensation expense

        373            —         373  

Interest income

        (258          (96     (354

Provision for income taxes.

        161            —         161  

Depreciation and amortization

        14,405            2,526       16,931  

Aircraft rent

        36,831            28,329       65,160  
  

 

 

    

 

 

        

 

 

   

 

 

 

Adjusted EBITDAR

   $        $ 49,688          $ 57,279     $ 106,967  
  

 

 

    

 

 

        

 

 

   

 

 

 


 

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Key Operating Statistics and Metrics

 

    2017     2018     2019  
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
 

Departures

    20,488       7,981       28,469       19,940       8,254       28,194        

Block hours

    68,357       16,941       85,298       68,548       17,335       85,883        

Aircraft miles

    27,823,467       6,358,418       34,181,885       27,725,797       6,369,866       34,095,663        

ASMs (in thousands)

    4,270,718       979,756       5,250,474       4,455,838       1,007,391       5,463,229        

TRASM (in cents)(1)

    *       *       10.65       *       *       10.66        

Average aircraft available for service(1)

    *       *       23.4       *       *       24.3        

Aircraft at end of period(1)

    *       *       26       *       *       30        

Average daily aircraft utilization (in hours) (1)

    *       *       9.9       *       *       9.7        

Passengers(2)

    2,502,082       *       *       2,614,929       *       *        

RPMs (in thousands) (2)

    3,419,527       *       *       3,653,007       *       *        

PRASM (in cents) (2)

    8.71       *       *       8.01       *       *        

Load factor(2)

    80.1     *       *       82.4     *       *        

Average fare(2)

  $ 148.60       *       *     $ 136.42       *       *        

Ancillary revenue per passenger(2)

  $ 13.34       *       *     $ 21.70       *       *        

Charter revenue per block hour

    *     $ 7,818       *       *     $ 8,767       *        

Fuel gallons consumed (in thousands)

    52,104       12,551       64,656       52,303       12,678       64,981        

Fuel cost per gallon, excl. derivatives

    *       *     $ 1.85       *       *     $ 2.34        

CASM (in cents)(3)

    *       *       10.09       *       *       10.05        

CASM excluding fuel (in cents) (3)

    *       *       7.79       *       *       6.94        

Adjusted CASM (in cents) (3)(4)

    *       *       7.79       *       *       7.05        

Employees at end of period

    *       *       1,889       *       *       1,549        

 

See “Glossary of Terms” for definitions of terms used in this table.

*

Certain operating statistics and metrics are not presented as they are not calculable or are not utilized by management.

(1)

Scheduled service and charter service utilize the same fleet of aircraft. Aircraft counts and utilization metrics are shown on a system basis only.

(2)

Passenger-related statistics and metrics are shown only for scheduled service. Charter service revenue is driven by flight statistics.

(3)

CASM is a key airline cost metric. CASM is defined as operating expenses divided by total available seat miles. CASM excluding fuel is one of the most important measures used by management and by our board of directors in assessing quarterly and annual cost performance. CASM excluding fuel is also a measure commonly used by industry analysts and we believe it is an important metric by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors. 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. We also exclude certain commissions and other costs of selling our vacations product from this measure as these costs are unrelated to our airline operations and may improve comparability to our peers. 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—CASM.”

(4)

We exclude special items and other adjustments as defined in the relevant reporting period that are unusual and not representative of our ongoing costs in our calculation of Adjusted CASM. Adjusted CASM is one of the most important measures used by management and by our board of directors in assessing quarterly and annual cost performance. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—CASM.”



 

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Glossary of Terms

Set forth below is a glossary of certain terms used in this prospectus:

“Adjusted CASM” means CASM excluding fuel and certain commissions and other costs of selling our vacations product and excluding special items and other adjustments as defined for the relevant reporting period. When Adjusted CASM is referenced or presented for other airlines, it has been adjusted to our stage length of 1,192 miles.

“Aircraft miles” means miles flown by all of our aircraft, measured by summing up the miles for each completed flight segment.

“Air traffic liability” means the value of tickets sold in advance of travel.

“ALPA” means the Air Line Pilots Association, the union representing our pilots.

“Ancillary revenue” consists primarily of revenue generated from air travel-related services such as baggage fees, seat selection and upgrade fees, itinerary service fees, on-board sales and sales of trip insurance.

“Ancillary services” refers to the services that generate ancillary revenue.

“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.

“Average aircraft” means the average number of aircraft used in flight operations, as calculated on a daily basis.

“Average daily aircraft utilization” means block hours divided by number of days in the period divided by average aircraft.

“Average stage length” means the average number of statute miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

“CASM” or “unit costs” means operating expenses divided by total ASMs. When CASM is referenced or presented for other airlines, it has been adjusted to our stage length of 1,192 miles.

“CASM excluding fuel” means CASM excluding fuel and certain commissions and other costs of selling our vacations product. When CASM excluding fuel is referenced or presented for other airlines, it has been adjusted to our stage length of 1,192 miles.

“CBA” means a collective bargaining agreement.

“CBP” means the United States Customs and Border Protection.

“Charter service” means flights operated for specific customers who purchase the entire flight from us and specify the origination and destination.

“Citizen of the United States” means (A) an individual who is a citizen of the United States; (B) a partnership each of whose partners is an individual who is a citizen of the United States; or (C) a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States.



 

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“Completion factor” means the percentage of scheduled flights that are completed.

“DOT” means the United States Department of Transportation.

“EPA” means the United States Environmental Protection Agency.

“ETOPS” means Extended-Range Twin-Engine Operational Performance Standards.

“FAA” means the United States Federal Aviation Administration.

“GDS” means a Global Distribution System such as Amadeus, Sabre and Travelport, used by travel agencies and corporations to purchase tickets on participating airlines.

“IBT” means the International Brotherhood of Teamsters, the union representing our flight attendants.

“LCC” means low-cost carrier and includes JetBlue Airways and Southwest Airlines.

“Load factor” means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs) for scheduled service.

“Mainline U.S. passenger airlines” includes us, Alaska Airlines, Allegiant Travel Company, American Airlines, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines and United Airlines.

“NMB” means the National Mediation Board.

“OTAs” means online travel agents.

“Passengers” means the total number of passengers flown on all flight segments.

“PRASM” means scheduled service revenue divided by ASMs for scheduled service.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“RLA” means the United States Railway Labor Act.

“Scheduled service” means transportation of passengers on flights we operate in and out of airports on a schedule of routes and flight times we provide for general sale.

“Scheduled service revenue” consists of base fares, unused and expired passenger credits and other expired travel credits for scheduled service.

“Stage-length adjustment” refers to an adjustment that can be utilized to compare CASM, PRASM and TRASM across airlines with varying stage lengths. All other things being equal, the same airline will have lower CASM, PRASM and TRASM as stage length increases since fixed and departure related costs are spread over increasingly longer average flight lengths. Therefore, as one method to facilitate comparison of these quantities across airlines (or even across the same airline for two different periods if the airline’s average stage length has changed significantly), it is common in the airline industry to settle on a common assumed stage length and then to adjust CASM, PRASM and TRASM appropriately. Stage-length adjusted comparisons are achieved by multiplying base CASM or RASM by a quotient, the numerator of which is the square root of the carrier’s stage



 

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length and the denominator of which is the square root of the common stage length. Stage-length adjustment techniques require judgment and different observers may use different techniques. For stage-length PRASM or TRASM comparisons in this prospectus, the stage length being utilized is the aircraft stage length.

“TRASM” or “unit revenue” means total revenue divided by total ASMs. When TRASM is referenced or presented for other airlines, it has been adjusted to our stage length of 1,192 miles.

“TSA” means the United States Transportation Security Administration.

“TWU” means the Transport Workers Union, the union representing our dispatchers.

“ULCC” means ultra low-cost carrier and includes Allegiant Travel Company, Frontier Airlines and Spirit Airlines.

“VFR” means visiting friends and relatives.



 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Class A common stock. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Any of the following risks could materially adversely affect our business, financial condition and results of operations, in which case the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks Related to Our Industry

The demand for airline services is highly sensitive to changes in economic conditions, and another recession or similar economic downturn in the United States would weaken demand for our services and have a material adverse effect on our business, results of operations and financial condition.

The demand for travel services is affected by U.S. and global economic conditions. Unfavorable economic conditions have historically reduced airline travel spending. For most passengers visiting friends and relatives and cost-conscious leisure travelers (our primary market), travel is a discretionary expense, and during periods of unfavorable economic conditions as a result of such carriers’ low base fares travelers have often elected to replace air travel at such times with car travel or other forms of ground transportation or have opted not to travel at all. Likewise, during periods of unfavorable economic conditions, businesses have deferred air travel or forgone it altogether. In addition, most of our charter revenue is generated from ad hoc or short-term contracts with repeat customers, and these customers may cease using our services or seek to negotiate more aggressive pricing during periods of unfavorable economic conditions. Any reduction in charter revenue during such periods could also increase our unit costs and thus have a material adverse effect on our business, results of operations and financial condition. Travelers have also reduced spending by purchasing fewer ancillary services, which can result in a decrease in average revenue per seat. Because airlines typically have relatively high fixed costs as a percentage of total costs, much of which cannot be mitigated during periods of lower demand for air travel, the airline business is particularly sensitive to changes in economic conditions. A reduction in the demand for air travel due to unfavorable economic conditions also limits our ability to raise fares to counteract increased fuel, labor and other costs. If U.S. or global economic conditions are unfavorable or uncertain for an extended period of time, it would have a material adverse effect on our business, results of operations and financial condition.

Our business has been and in the future may be materially adversely affected by the price and availability of aircraft fuel. Unexpected increases in the price of aircraft fuel or a shortage or disruption in the supply of aircraft fuel could have a material adverse effect on our business, results of operations and financial condition.

The cost of aircraft fuel is highly volatile and in recent years has been our largest individual operating expense, accounting for approximately     % and 30.1% of our operating expenses for the years ended December 31, 2019 and 2018, respectively. High fuel prices or increases in fuel costs (or in the price of crude oil) could have a material adverse effect on our business, results of operations and financial condition, including as a result of legacy network airlines and LCCs adapting more rapidly or effectively to higher fuel prices through new-technology aircraft that is more fuel efficient than our aircraft. Over the past several years, the price of aircraft fuel has fluctuated substantially and prices continue to be highly volatile and could increase significantly at any time. In addition, prolonged low fuel prices could limit our ability to differentiate our product and low fares from those of the legacy network airlines and LCCs, as prolonged low fuel prices could enable such carriers to, among other things, substantially decrease their costs, fly longer stages or utilize older aircraft.

 

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Our business is also dependent on the availability of aircraft fuel (or crude oil), which is not predictable. Weather-related events, natural disasters, terrorism, wars, political disruption or instability involving oil-producing countries, changes in governmental or cartel policy concerning crude oil or aircraft fuel production, labor strikes or other events affecting refinery production, transportation, taxes or marketing, environmental concerns, market manipulation, price speculation, changes in currency exchange rates and other unpredictable events may drive actual or perceived fuel supply shortages. Shortages in the availability of, or increases in demand for, crude oil in general, other crude oil-based fuel derivatives and aircraft fuel in particular could result in increased fuel prices and could have a material adverse effect on our business, results of operations and financial condition.

We may not be able to increase ticket prices sufficiently to cover increased fuel costs, particularly when fuel prices rise quickly. We sell a significant number of tickets to passengers well in advance of travel, and, as a result, fares sold for future travel may not reflect increased fuel costs. In addition, our ability to increase ticket prices to offset an increase in fuel costs is limited by the competitive nature of the airline industry and the price sensitivity associated with air travel, particularly leisure travel, and any increases in fares may reduce the general demand for air travel.

From time to time, we may enter into fuel derivative contracts in order to mitigate the risk to our business from future volatility in fuel prices but such contracts may not fully protect us from all related risks. As of December 31, 2019, we had hedges in place for approximately      % of our projected fuel requirements for scheduled service operations in 2020, with all of our then existing options expected to be exercised or expire by the end of 2021. Generally speaking, our charter operations have pass-through provisions for fuel costs, and as such we do not hedge our fuel requirements for that portion of our business. Our hedges in place at the end of 2019 consisted of collars and the underlying commodities consisted of both Gulf Coast Jet Fuel contracts as well as West Texas Intermediate Crude Oil contracts.

Our hedging strategy to date has been designed to protect our liquidity position in the event of a rapid and/or sustained rise in fuel prices that does not allow for immediate response in ticket prices. We may enter into derivatives that do not qualify for hedge accounting, which can impact our results of operations and increase the volatility of our earnings due to recognizing the mark-to-market impact of our hedge portfolio as a result of changes in the forward markets for oil and/or jet fuel. We cannot assure you our fuel hedging program will be effective or that we will maintain a fuel hedging program. Even if we are able to hedge portions of our future fuel requirements, we cannot guarantee that our hedge contracts will provide an adequate level of protection against increased fuel costs or that the counterparties to our hedge contracts will be able to perform. Additionally, our ability to realize the benefit of declining fuel prices will be limited by the impact of any fuel hedges in place, we may incur additional expenses in connection with entering into derivative contracts and we may record significant losses on fuel hedges during periods of declining prices. A failure of our fuel hedging strategy, potential margin funding requirements, overpaying for fuel through the use of hedging arrangements or our failure to maintain a fuel hedging program could prevent us from adequately mitigating the risk of fuel price increases and could have a material adverse effect on our business, results of operations and financial condition.

Threatened or actual terrorist attacks or security concerns involving airlines could have a material adverse effect on our business, results of operations and financial condition.

Past terrorist attacks or attempted attacks, particularly those against airlines, have caused substantial revenue losses and increased security costs, and any actual or threatened terrorist attack or security breach, even if not directly against an airline, could have a material adverse effect on our business, results of operations and financial condition. Security concerns resulting in enhanced passenger screening, increased regulation governing carry-on baggage and other similar restrictions on passenger travel may further increase passenger inconvenience and reduce the demand for air travel. In addition, increased or enhanced security measures have tended to result in higher governmental fees imposed on airlines, resulting in higher operating costs for airlines, which we may not be able to pass on to consumers in the form of higher prices. Terrorist attacks, or the fear of such attacks or

 

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other hostilities (including elevated national threat warnings or selective cancellation or redirection of flights due to terror threats), even if not made directly on or involving the airline industry, could have a negative impact on the airline industry and have a material adverse effect on our business, results of operations and financial condition.

The airline industry is exceedingly competitive, and we compete against low-cost carriers and ultra low-cost carriers and legacy network airlines; if we are not able to compete successfully in our markets, our business will be materially adversely affected.

We face significant competition with respect to routes, fares and services. Within the airline industry, we compete with ultra low-cost carriers, or ULCCs, low-cost carriers, or LCCs, as well as legacy network airlines, for airline passengers traveling on the routes we serve, particularly customers traveling in economy or similar classes of service. Competition on most of the routes we presently serve is intense, due to the large number of carriers in those markets. Furthermore, other airlines may begin service or increase existing service on routes where we currently face no or little competition. In almost all instances, our competitors are larger than we are and possess significantly greater financial and other resources than we do.

The airline industry is particularly susceptible to price discounting because, once a flight is scheduled, airlines incur only nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price competition could adversely affect our operations. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to increase revenue per available seat mile. The prevalence of discount fares can be particularly acute when a competitor has excess capacity to sell. Moreover, many other airlines have unbundled their services, at least in part, by charging separately for services such as baggage and advance seat selection, which previously were offered as a component of base fares. This unbundling and other cost-reducing measures could enable competitor airlines to reduce fares on routes that we serve. The availability of low-priced fares coupled with an increase in domestic capacity has led to dramatic changes in pricing behavior in many U.S. markets. Many domestic carriers began matching lower cost airline pricing, either with limited or unlimited inventory.

Our growth and the success of our high-growth, low-cost business model could stimulate competition in our markets through our competitors’ development of their own LCC or ULCC strategies, new pricing policies designed to compete with LCCs, ULCCs or new market entrants. Airlines increase or decrease capacity in markets based on perceived profitability. If our competitors increase overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or route that we serve, it could have a material adverse impact on our business. If a legacy network airline were to successfully develop a low-cost product or if we were to experience increased competition from LCCs, our business could be materially adversely affected. Regardless of cost structure, the domestic airline industry has often been the source of fare wars undertaken to grow market share or for other reasons. Additionally, each of American Airlines, Delta Air Lines and United Airlines has begun to offer a so-called “basic economy” offering with reduced amenities designed specifically to compete against LCCs and ULCCs, which presents a significant form of competition for us.

A competitor adopting an LCC or ULCC strategy may have greater financial resources and access to lower cost sources of capital than we do, which could enable them to operate their business with a lower cost structure, or enable them to operate with lower marginal revenues without substantial adverse effects, than we can. If these competitors adopt and successfully execute an LCC or ULCC business model, our business could be materially adversely affected.

Similarly, our competitors may choose to commence or expand their existing charter operations, which could adversely impact our ability to obtain or renew charter contracts, especially in periods of low demand. This could result in decreases in our charter services market share and reduced profitability for our charter operations, which would have a material adverse effect on our business, results of operations and financial condition.

 

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There has been significant consolidation within the airline industry, including, for example, the combinations of American Airlines and US Airways, Delta Air Lines and Northwest Airlines, United Airlines and Continental Airlines, Southwest Airlines and AirTran Airways, and Alaska Airlines and Virgin America. In the future, there may be additional consolidation in our industry. Business combinations could significantly alter industry conditions and competition within the airline industry and could permit our competitors to reduce their fares.

The extremely competitive nature of the airline industry could prevent us from attaining the level of passenger traffic or maintaining the level of fares or ancillary revenues required to sustain profitable operations in new and existing markets and could impede our growth strategy, which could harm our operating results. Due to our relatively small size, we are susceptible to a fare war or other competitive activities in one or more of the markets we serve, which could have a material adverse effect on our business, results of operations and financial condition.

Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control inefficiencies; government shutdowns; FAA grounding of aircraft; major construction or improvements at airports; adverse weather conditions, such as hurricanes or blizzards; increased security measures; new travel-related taxes; or the outbreak of disease, any of which could have a material adverse effect on our business, results of operations and financial condition.

Like other airlines, our business is affected by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, major construction or improvements at airports at which we operate, increased security measures, new travel-related taxes and fees, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers and increase costs and decrease revenues, which in turn could adversely affect profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA to operate that airspace in a safe, efficient and affordable manner. The air traffic control system, which is operated by the FAA, faces challenges in managing the growing demand for U.S. air travel. U.S. and foreign air traffic controllers often rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. The federal government also controls airport security. In addition, there are proposals before Congress that would treat a wide range of consumer protection issues, including, among other things, proposals to regulate seat size, which could increase the costs of doing business. There are additional proposals before Congress that could potentially lead to the privatization of the United States’ air traffic control system, which could adversely affect our business. Further, implementation of the Next Generation Air Transport System, or NextGen, by the FAA would result in changes to aircraft routings and flight paths that could lead to increased noise complaints and lawsuits, resulting in increased costs. In addition, federal government shutdowns can affect the availability of federal resources necessary to provide air traffic control and airport security. Furthermore, a federal government grounding of our aircraft type could result in flight cancellations and adversely affect our business.

Adverse weather conditions and natural disasters, such as hurricanes, thunderstorms, winter snowstorms or earthquakes, can cause flight cancellations or significant delays, and in the past have led to Congressional demands for investigations. Cancellations or delays due to adverse weather conditions or natural disasters, air traffic control problems or inefficiencies, breaches in security or other factors may affect us to a greater degree than other, larger airlines that may be able to recover more quickly from these events, and therefore could have a material adverse effect on our business, results of operations and financial condition to a greater degree than other air carriers. Because of our day of week, limited schedule and optimized utilization and point-to-point network, operational disruptions can have a disproportionate impact on our ability to recover. In addition, many airlines reaccommodate their disrupted passengers on other airlines at prearranged rates under flight interruption manifest agreements. We have been unsuccessful in procuring any of these agreements with our peers, which makes our recovery from disruption more challenging than for larger airlines that have these agreements in place. Similarly, outbreaks of pandemic or contagious diseases, such as ebola, measles, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine) flu, pertussis (whooping cough) and zika virus, could result in significant decreases in passenger traffic and the imposition of government restrictions in service and could have a material adverse impact on the airline industry. Any increases in travel-related taxes could also result in

 

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decreases in passenger traffic. Any general reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition. Moreover, U.S. federal government shutdowns may cause delays and cancellations or reductions in discretionary travel due to longer security lines, including as a result of furloughed government employees or reductions in staffing levels, including air traffic controllers. U.S. government shutdowns may also impact our ability to take delivery of aircraft and commence operations in new domestic stations. Another extended shutdown like the one in December 2018-January 2019 may have a negative impact on our operations and financial results.

Risks associated with our presence in international markets, including political or economic instability, and failure to adequately comply with existing and changing legal requirements, may materially adversely affect us.

Some of our target growth markets include countries with less developed economies, legal systems, financial markets and business and political environments that are vulnerable to economic and political disruptions, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking and the imposition of taxes or other charges by governments, as well as health and safety concerns. The occurrence of any of these events in markets served by us now or in the future and the resulting instability may have a material adverse effect on our business, results of operations and financial condition.

We emphasize compliance with all applicable laws and regulations in all jurisdictions where we operate and have implemented and continue to implement and refresh policies, procedures and certain ongoing training of our employees, third-party providers and partners with regard to business ethics and key legal requirements; however, we cannot assure you that our employees, third-party providers or partners will adhere to our code of ethics, other policies or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate recordkeeping and internal accounting practices to record our transactions accurately, we may be subject to sanctions. In the event we believe or have reason to believe our employees, third-party providers or partners have or may have violated applicable laws or regulations, we may incur investigation costs, potential penalties and other related costs, which in turn may materially adversely affect our reputation and could have a material adverse effect on our business, results of operations and financial condition.

Increases in insurance costs or reductions in insurance coverage may have a material adverse effect on our business, results of operations and financial condition.

If any of our aircraft were to be involved in a significant accident or if our property or operations were to be affected by a significant natural catastrophe or other event, we could be exposed to material liability or loss. If we are unable to obtain sufficient insurance (including aviation hull and liability insurance and property and business interruption coverage) to cover such liabilities or losses, whether due to insurance market conditions or otherwise, our business could be materially adversely affected.

We currently obtain third-party war risk (terrorism) insurance as part of our commercial aviation hull and liability policy and additional third-party war risk (terrorism) insurance through a separate policy with a different private insurance company. Our current war risk insurance from commercial underwriters excludes nuclear, radiological and certain other events. The global insurance market for aviation-related risks has been faced with significant losses, resulting in substantial tightening in insurance markets with reduced capacity and increased prices. If we are unable to obtain adequate third-party hull and liability or third-party war risk (terrorism) insurance or if an event not covered by the insurance we maintain were to take place, our business could be materially adversely affected.

 

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The airline industry is heavily taxed.

The airline industry is subject to extensive government fees and taxation that negatively impact our revenue and profitability. The U.S. airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade for domestic flights, and various U.S. fees and taxes also are assessed on international flights. For example, as permitted by federal legislation, most major U.S. airports impose a passenger facility charge per passenger on us. In addition, the governments of foreign countries in which we operate impose on U.S. airlines, including us, various fees and taxes, and these assessments have been increasing in number and amount in recent years. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. We collect the excise tax, along with certain other U.S. and foreign taxes and user fees on air transportation (such as passenger security fees), and pass along the collected amounts to the appropriate governmental agencies. Although these taxes and fees are not our operating expenses, they represent an additional cost to our customers, which, because we operate in a highly elastic environment, drives down demand. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and charges imposed on airlines and their passengers, including the passenger facility charge, and we may not be able to recover all of these charges from our customers. Increases in such taxes, fees and charges could negatively impact our business, results of operations and financial condition.

Under regulations set forth by the Department of Transportation, or the DOT, all governmental taxes and fees must be included in the prices we quote or advertise to our customers. Due to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer. Further increases in fees and taxes may reduce demand for air travel, and thus our revenues.

Restrictions on or increased taxes applicable to charges for ancillary products and services paid by airline passengers and burdensome consumer protection regulations or laws could harm our business, results of operations and financial condition.

For the years ended December 31, 2019 and 2018, we generated ancillary revenues of $        million and $56.7 million, respectively. Our ancillary revenue consists primarily of revenue generated from air travel-related services such as baggage fees, seat selection and upgrade fees, itinerary service fees, on-board sales and sales of trip insurance. The DOT has rules governing many facets of the airline-consumer relationship, including, for instance, consumer notice requirements, handling of consumer complaints, price advertising, lengthy tarmac delays, oversales and denied boarding process/compensation, ticket refunds, liability for loss, delay or damage to baggage, customer service commitments, contracts of carriage, consumer disclosures and the transportation of passengers with disabilities. The DOT periodically audits airlines to determine whether such airlines have violated any of the DOT rules. If the DOT determines that we are not, or have not been, in compliance with these rules or if we are unable to remain compliant, the DOT may subject us to fines or other enforcement action. The DOT may also impose additional consumer protection requirements, including adding requirements to modify our websites and computer reservations system, which could have a material adverse effect on our business, results of operations and financial condition. The U.S. Congress and the DOT have examined the increasingly common airline industry practice of unbundling the pricing of certain products and ancillary services, a practice that is a core component of our business strategy. If new laws or regulations are adopted that make unbundling of airline products and services impermissible, or more cumbersome or expensive, or if new taxes are imposed on ancillary revenues, our business, results of operations and financial condition could be negatively impacted. Congressional, Federal agency and other government scrutiny may also change industry practice or the public’s willingness to pay for ancillary services. See also “ —We are subject to extensive regulation by the FAA, the DOT, the TSA, CBP and other U.S. and foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our business, results of operations and financial condition.”

 

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We are subject to risks associated with climate change, including increased regulation to reduce emissions of greenhouse gases.

Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad. In particular, in June 2015, the Environmental Protection Agency, or the EPA, announced a proposed endangerment finding that aircraft engine greenhouse gas, or GHG, emissions cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. If the EPA makes a final, positive endangerment finding, the EPA is obligated under the Clean Air Act to set GHG emissions standards for aircraft. In addition, federal climate legislation, including the “Green New Deal” resolution, has been introduced in Congress recently, although Congress has yet to pass a bill specifically addressing GHG regulation. Several states are also considering or have adopted initiatives to regulate emissions of GHGs, primarily through the planned development of GHG emissions inventories and/or regional cap-and-trade programs. On March 6, 2017, the International Civil Aviation Organization, or ICAO, an agency of the United Nations established to manage the administration and governance of the Convention on International Civil Aviation, adopted new carbon dioxide, or CO2 certification standards for new aircraft beginning in 2020. The new CO2 standards will apply to new aircraft type designs from 2020, and to aircraft type designs already in production as of 2023. In-production aircraft that do not meet the standard by 2028 will no longer be able to be produced unless their designs are modified to meet the new standards.

In addition, in October 2016, the ICAO adopted the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, which is a global, market-based emissions offset program designed to encourage carbon-neutral growth beyond 2020. Further, in June 2018 the ICAO adopted standards pertaining to the collection and sharing of information on international aviation emissions beginning in 2019. The CORSIA will increase operating costs for us and other U.S. airlines that operate internationally. The CORSIA is being implemented in phases, with information sharing beginning in 2019 and a pilot phase beginning in 2021. Certain details are still being developed and the impact cannot be fully predicted. The potential impact of the CORSIA or other emissions-related requirements on our costs will ultimately depend on a number of factors, including baseline emissions, the price of emission allowances or offsets that we would need to acquire, the efficiency of our fleet and the number of flights subject to these requirements. These costs have not been completely defined and could fluctuate.

In the event that legislation or regulation with respect to GHG emissions associated with aircraft or applicable to the fuel industry is enacted in the United States or other jurisdictions where we operate or where we may operate in the future, or as part of international conventions to which we are subject, it could result in significant costs for us and the airline industry. In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs that could result from fuel suppliers passing on increased costs that they incur under such a system.

We face competition from air travel substitutes.

In addition to airline competition from legacy network airlines, LCCs and ULCCs, we also face competition from air travel substitutes. Our business serves primarily leisure travelers, for whom travel is entirely discretionary. On our domestic routes, particularly those with shorter stage lengths, we face competition from some other transportation alternatives, such as bus, train or automobile. In addition, technology advancements may limit the demand for air travel. For example, video teleconferencing and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower-cost substitutes for air travel. If we are unable to stimulate demand for air travel with our low base fares or if we are unable to adjust rapidly in the event the basis of competition in our markets changes, it could have a material adverse effect on our business, results of operations and financial condition.

 

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Risks Related to Our Business

If we fail to implement our business strategy successfully, our business will be materially adversely affected.

Our business strategy includes growth in our aircraft fleet, expansion of markets we serve by building out our MSP hub and growing non-MSP point-to-point markets, increasing the seats in each aircraft, expanding our ancillary product offering and growing our charter service. When developing our route network, we focus on gaining market share on routes that have been underserved or are served primarily by higher cost airlines where we have a competitive cost advantage. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to sustain or increase our profitability. We face numerous challenges in implementing our growth strategy, including our ability to:

 

   

sustain our relatively low unit costs, continue to realize attractive revenue performance and maintain profitability;

 

   

stimulate traffic with low fares;

 

   

maintain an optimal level of aircraft utilization to execute our scheduled and charter operations;

 

   

access airports located in our targeted geographic markets; and

 

   

maintain operational performance necessary to complete all flights.

If we are unable to obtain and maintain access to a sufficient number of slots, gates or related ground facilities at desirable airports to accommodate our growing fleet, we may be unable to compete in desirable markets, our aircraft utilization rate could decrease, and we could suffer a material adverse effect on our business, results of operations and financial condition.

Our growth is also dependent upon our ability to maintain a safe and secure operation and will require additional personnel, equipment and facilities as we induct new aircraft and continue to execute our growth plan. In addition, we will require additional third-party personnel for services we do not undertake ourselves. An inability to hire and retain personnel, timely secure the required equipment and facilities in a cost-effective manner, efficiently operate our expanded facilities or obtain the necessary regulatory approvals may adversely affect our ability to achieve our growth strategy, which could harm our business. Furthermore, expansion to new markets may have other risks due to factors specific to those markets. We may be unable to foresee all of the existing risks upon entering certain new markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition, our competitors may reduce their fares and/or offer special promotions following our entry into a new market and may also offer more attractive frequent flyer programs and/or access to marketing alliances with other airlines, which we do not currently offer. We cannot assure you that we will be able to profitably expand our existing markets or establish new markets.

The anticipated strategic and financial benefits of the ATSA may not be realized.

In December 2019, we entered into the ATSA with Amazon with the expectation that the transactions contemplated thereby would result in various benefits including, among others, growth in revenues, improved cash flows and operating efficiencies. Achieving the anticipated benefits from the ATSA is subject to a number of challenges and uncertainties, such as unforeseen maintenance and other costs and our ability to hire pilots, crew and other personnel necessary to support the Amazon operations. We have not historically had any significant cargo operations, nor have we had main deck cargo operations. If we are unable to successfully implement the Amazon operations and achieve our objectives, the expected benefits may be only partially realized or not at all, or may take longer to realize than expected. In addition, if we fail to perform under the terms and conditions of the contract, we may be required to pay fees or penalties to Amazon and, in certain cases, Amazon may have the right to terminate the agreement. The ATSA is also subject to two, two-year extension options, which Amazon may choose not to exercise. Importantly, Amazon has not agreed to any minimum flying requirements under the ATSA and could choose not to fly significant volumes with us. Moreover, we plan to

 

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decrease our scheduled service operations for the summer of 2020 to divert more resources towards the Amazon operations during the ramp up period, which is expected to extend through the fourth quarter of 2020 but which could be longer, and accordingly our results for scheduled service operations will be adversely affected as we implement our Amazon operations. If we do not achieve the benefits we expect from our Amazon operations to offset the impact on our scheduled passenger service and charter operations, we could suffer from a material adverse effect on our financial condition and results of operations.

Our low-cost structure is one of our primary competitive advantages, and many factors could affect our ability to control our costs.

Our low-cost structure is one of our primary competitive advantages. However, we have limited control over many of our costs. For example, we have limited control over the price and availability of aircraft fuel, aviation insurance, the acquisition and cost of aircraft, airport and related infrastructure costs, taxes, the cost of meeting changing regulatory requirements, the cost of capable talent at market wages and our cost to access capital or financing. In addition, the compensation and benefit costs applicable to a significant portion of our employees are established by the terms of collective bargaining agreements, substantially all of which are currently open and are being negotiated. See “ —Increased labor costs, union disputes, employee strikes and other labor-related disruption may adversely affect our business, results of operations and financial condition.” We cannot guarantee we will be able to maintain our relatively low costs. If our cost structure increases and we are no longer able to maintain a competitive cost structure, it could have a material adverse effect on our business, results of operations and financial condition.

Our business is significantly tied to and consolidated in our main hub in Minneapolis-St. Paul, and any decrease in traffic in this hub could have a material adverse effect on our business, operations, financial condition and brand.

Our service is concentrated around our hub in MSP and our business is impacted by economic and geophysical factors of this region. We maintain a large presence in MSP with approximately 89% of flights in 2018 having MSP as either their origin or destination. Flight operations in Minneapolis can face extreme weather challenges in all seasons but especially in the winter which at times has resulted in severe disruptions in our operation and the incurrence of material costs as a consequence of such disruptions. Our business could be further harmed by an increase in the amount of direct competition we face in the Minneapolis market or by continued or increased congestion, delays or cancellations. For instance, MSP is also a significant hub for Delta Air Lines. If Delta Air Lines or another legacy network airline were to successfully develop low-cost or low-fare products or if we were to experience increased competition from LCCs or ULCCs in the Minneapolis market, our business, results of operations and prospects could be materially adversely affected.

Our business would also be negatively impacted by any circumstances causing a reduction in demand for air transportation in the Minneapolis area, such as adverse changes in local economic conditions, health concerns, adverse weather conditions, negative public perception of Minneapolis, terrorist attacks or significant price or tax increases linked to increases in airport access costs and fees imposed on passengers.

We have third-party vendors that support our MSP operations and we cannot guarantee that these vendors will operate to our expectations. We currently operate out of Terminal 2 at MSP. Our access to use our existing gates and other facilities in Terminal 2 is not guaranteed. We cannot assure you that our continued use of our facilities at MSP will occur on acceptable terms with respect to operations and cost of operations, or at all, or that our ongoing use of these facilities will not include additional or increased fees.

 

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Our reputation and business could be adversely affected in the event of an accident or similar public incident involving our aircraft or personnel.

We are exposed to potential significant losses and adverse publicity in the event that any of our aircraft or personnel is involved in an accident, terrorist incident or other similar public incident, which could expose us to significant reputational harm and potential legal liability. In addition, we could face significant costs related to repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. We cannot assure you that we will not be affected by such events or that the amount of our insurance coverage will be adequate in the event such circumstances arise and any such event could cause a substantial increase in our insurance premiums. In addition, any future accident or similar incident involving our aircraft or personnel, even if fully covered by insurance or even if it does not involve our airline, may create an adverse public perception about our airline or that the equipment we fly is less safe or reliable than other transportation alternatives, or, in the case of our aircraft, could cause us to perform time-consuming and costly inspections on our aircraft or engines, any of which could have a material adverse effect on our business, results of operations and financial condition.

In addition, any accident involving the Boeing 737-NG or an aircraft similar to the Boeing 737-NG that we operate could result in the curtailment of such aircraft by aviation regulators, manufacturers and other airlines and could create a negative public perception about the safety of our aircraft, any of which could have a material adverse effect on our business, results of operations and financial condition. For example, in 2019, certain global aviation regulators and airlines grounded the Boeing 737 MAX in response to accidents involving aircraft flown by Lion Air and Ethiopian Airlines. In addition, following a 2018 accident involving the failure of a turbofan on a 737-700 aircraft, the National Transportation Safety Board, or NTSB, has recommended that regulators require Boeing to redesign the engine cowl on 737-NG aircraft and retrofit in service 737-NG aircraft with the redesigned cowl. We cannot predict when the FAA will respond to the NTSB recommendations and if it will require us to replace the engine cowls in our aircraft. The resolution of this matter or similar matters in the future could have an impact on our results of operations, business and prospects.

Unauthorized breach of our information technology infrastructure could compromise the personally identifiable information of our passengers, prospective passengers or personnel and expose us to liability, damage our reputation and have a material adverse effect on our business, results of operations and financial condition.

In the processing of our customer transactions and as part of our ordinary business operations, we and certain of our third-party providers collect, process, transmit and store a large volume of personally identifiable information, including email addresses and home addresses and financial data such as credit and debit card information. This data is increasingly subject to legislation and regulation, such as the Fair Accurate Credit Transparency Act, Payment Card Industry legislation, the California Consumer Privacy Act and the European Union’s General Data Protection Regulation typically intended to protect the privacy of personal data that is collected, processed, stored and transmitted. The security of the systems and network where we and our third-party providers store this data is a critical element of our business, and these systems and our network may be vulnerable to theft, loss, damage and interruption from a number of potential sources and events, including computer viruses, hackers, denial-of-service attacks, employee theft or misuse, natural or man-made disasters, telecommunications failures, power loss and other disruptive sources and events. As the cyber-threat landscape evolves, attacks are growing in frequency, sophistication and intensity, and are becoming increasingly difficult to detect. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Attacks may be targeted at us, our customers and our providers, including air navigation service providers, or others who have entrusted us with information, including regulators such as the FAA and DOT. In addition, attacks not targeted at us, but targeted solely at providers, may cause disruption to our computer systems or a breach of the data that we maintain on customers, employees, providers and others. Recently, several high profile consumer-oriented companies have experienced significant data breaches, which have caused those companies to suffer substantial financial and reputational harm. We cannot assure you that the precautions we have taken to avoid an unauthorized incursion of our computer systems are either adequate or implemented

 

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properly to prevent a data breach and its adverse financial and reputational consequences to our business. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of or access to the personally identifiable information of our passengers, prospective passengers or personnel could result in governmental investigation, civil liability or regulatory penalties under laws protecting the privacy of personal information, and our reputation could be harmed, any or all of which could disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.

Additionally, any material failure by us or our third-party providers to maintain compliance with the Payment Card Industry security requirements or to rectify a data security issue may result in fines and restrictions on our ability to accept credit and debit cards as a form of payment. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants, or costs incurred in connection with the notifications to customers, employees, providers or the general public as part of our notification obligations to the various governments that govern our business. In addition, data and security breaches can also occur as a result of non-technical issues, including breaches by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information.

We are subject to increasing legislative, regulatory and customer focus on privacy issues and data security in the United States and abroad. In addition, a number of our commercial partners, including credit card companies, have imposed data security standards on us, and these standards continue to evolve. We will continue our efforts to meet our privacy and data security obligations; however, it is possible that certain new obligations may be difficult to meet and could increase our costs. Additionally, we must manage evolving cybersecurity risks. The loss, disclosure, misappropriation of or access to the information of our customers, personnel or business partners or any failure by us to meet our obligations could result in legal claims or proceedings, liability or regulatory penalties.

We rely on third-party providers and other commercial partners to perform functions integral to our operations.

We have entered into agreements with third-party providers to furnish certain facilities and services required for our operations, including ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new markets we decide to enter, and we cannot assure you that we will be able to obtain the necessary services at acceptable rates. Certain of these providers are an integral part of our operations at our main hub in MSP.

Although we seek to monitor the performance of third parties that furnish certain facilities or provide us with our ground handling, catering, passenger handling, engineering, maintenance, refueling, reservations and airport facilities, the efficiency, timeliness and quality of contract performance by third-party providers are often beyond our control, and any failure by our third-party providers to perform up to our expectations may have an adverse impact on our business, reputation with customers, our brand and our operations. These service agreements are generally subject to termination after notice by the third-party providers. In addition, we could experience a significant business disruption if we were to change vendors or if an existing provider ceased to be able to serve us. We expect to be dependent on such third-party arrangements for the foreseeable future.

We rely on third-party distribution channels to distribute a portion of our airline tickets.

We rely on third-party distribution channels, including those provided by or through global distribution systems, or GDSs, conventional travel agents and online travel agents, or OTAs, to distribute a significant portion of our airline tickets, and we expect in the future to rely on these channels to also collect a portion of our ancillary revenues. These distribution channels are more expensive and at present have less functionality in respect of ancillary revenues than those we operate ourselves, such as our website. Certain of these distribution

 

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channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to successfully manage our distribution costs and rights, and improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure. Negotiations with key GDSs and OTAs designed to manage our costs, increase our distribution flexibility, and improve functionality could be contentious, could result in diminished or less favorable distribution of our tickets, and may not provide the functionality we require to maximize ancillary revenues. In addition, in the last several years there has been significant consolidation among GDSs and OTAs. This consolidation and any further consolidation could affect our ability to manage our distribution costs due to a reduction in competition or other industry factors. Any inability to manage such costs, rights and functionality at a competitive level or any material diminishment in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations. Moreover, our ability to compete in the markets we serve may be threatened by changes in technology or other factors that may make our existing third-party sales channels impractical, uncompetitive or obsolete.

We rely heavily on technology and automated systems to operate our business, and any disruptions or failure of these technologies or systems or any failure on our part to implement any new technologies or systems could materially adversely affect our business.

We are highly dependent on technology and computer systems and networks to operate our business. These technologies and systems include our computerized airline reservation system provided by Navitaire, a unit of Amadeus, flight operations systems, telecommunications systems, mobile phone application, airline website and maintenance systems. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Our reservations system, which is hosted and maintained under a long-term contract by a third-party provider, is critical to our ability to issue, track and accept electronic tickets, conduct check-in, board and manage our passengers through the airports we serve and provide us with access to GDSs, which enlarge our pool of potential passengers. There are many instances in the past where a reservations system malfunctioned, whether due to the fault of the system provider or the airline, with a highly adverse effect on the airline’s operations, and such a malfunction has in the past and could in the future occur on our system, or in connection with any system upgrade or migration in the future. We also rely on third-party providers to maintain our flight operations systems, and if those systems are not functioning, we could experience service disruptions, which could result in the loss of important data, increase our expenses, decrease our operational performance and temporarily stall our operations.

Any failure of the technologies and systems we use could materially adversely affect our business. In particular, if our reservation system fails or experiences interruptions, and we are unable to book seats for a period of time, we could lose a significant amount of revenue as customers book seats on other airlines, and our reputation could be harmed. In addition, replacement technologies and systems for any service we currently utilize that experiences failures or interruptions may not be readily available on a timely basis, at competitive rates or at all. Furthermore, our current technologies and systems are heavily integrated with our day-to-day operations and any transition to a new technology or system could be complex and time-consuming. Our technologies and systems cannot be completely protected against events that are beyond our control, including natural disasters, cyber attacks or telecommunications failures. Substantial or sustained disruptions or system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We cannot assure you that any of our security measures, change control procedures or disaster recovery plans that we have implemented are adequate to prevent disruptions or failures. In the event that one or more of our primary technology or systems vendors fails to perform and a replacement system is not available or if we fail to implement a replacement system in a timely and efficient manner, our business could be materially adversely affected.

In addition, in the ordinary course of business, our systems will continue to require modification and refinements to address growth and changing business requirements and to enable us to comply with changing

 

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regulatory requirements. Modifications and refinements to our systems have been and are expected to continue to be expensive to implement and can divert management’s attention from other matters. Furthermore, our operations could be adversely affected, or we could face impositions of regulatory penalties, if we were unable to timely or effectively modify our systems as necessary or appropriately balance the introduction of new capabilities with the management of existing systems.

We may not be able to grow or maintain our unit revenues or maintain our ancillary revenues.

A key component of our strategy was establishing Sun Country as a premier high-growth, low-cost carrier in the United States by attracting customers with low fares and garnering repeat business by delivering a high-quality customer experience with additional free amenities than traditionally provided on ULCCs in the United States. We intend to continue to differentiate our brand and product in order to expand our loyal customer base and grow or maintain our unit revenues and maintain our ancillary revenues. Differentiating our brand and product has required and will continue to require significant investment, and we cannot assure you that the initiatives we have implemented will continue to be successful or that the initiatives we intend to implement will be successful. If we are unable to maintain or further differentiate our brand and product from LCCs or ULCCs, our market share could decline, which could have a material adverse effect on our business, results of operations and financial condition. We may also not be successful in leveraging our brand and product to stimulate new demand with low base fares or gain market share from the legacy airlines.

In addition, our business strategy includes maintaining our portfolio of desirable, value-oriented, ancillary products and services. However, we cannot assure you that passengers will continue to perceive value in the ancillary products and services we currently offer and regulatory initiatives could adversely affect ancillary revenue opportunities. Failure to maintain our ancillary revenues would have a material adverse effect on our business, results of operations and financial condition. Furthermore, if we are unable to maintain our ancillary revenues, we may not be able to execute our strategy to continue to lower base fares in order to stimulate demand for air travel.

We operate a single aircraft type.

A critical cost-saving element of our business strategy is to operate a single-family aircraft fleet; however, our dependence on the Boeing 737-NG aircraft and CFM56 engines for all of our aircraft makes us vulnerable to any design defects or mechanical problems associated with this aircraft type or these engines. In the event of any actual or suspected design defects or mechanical problems with these family aircraft or engines, whether involving our aircraft or that of another airline, we may choose or be required to suspend or restrict the use of our aircraft. For example, several Boeing 737-NG aircraft have recently been grounded by other airlines after inspections revealed cracks in the “pickle forks,” a component of the structure connecting the wings to the fuselages. Our business could also be materially adversely affected if the public avoids flying on our aircraft due to an adverse perception of the Boeing 737-NG aircraft or CFM56 engines, whether because of safety concerns or other problems, real or perceived, or in the event of an accident involving such aircraft or engines. Additionally, while we do not operate the Boeing 737 MAX, the grounding of that fleet has led to increased competition for near term leases for other Boeing 737 aircraft.

Increased labor costs, union disputes, employee strikes and other labor-related disruption may adversely affect our business, results of operations and financial condition.

Our business is labor intensive, with labor costs representing approximately     % and 23.2% of our total operating costs for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2018, approximately 53% of our workforce was represented by labor unions. We cannot assure you that our labor costs going forward will remain competitive or that any new agreements into which we enter will not have terms with higher labor costs or that the negotiations of such labor agreements will not result in any work stoppages. In addition, one or more of our competitors may significantly reduce their labor costs, thereby providing them with

 

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a competitive advantage over us. Furthermore, our labor costs may increase in connection with our growth. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize.

Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, or the RLA. Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board, or the NMB. This process continues until either the parties have reached agreement on a new collective bargaining agreement, or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

Our collective bargaining agreement with our dispatchers became amendable on September 27, 2017 and we entered into NMB mediation with the union representing this group on September 19, 2018. On December 3, 2019 our dispatchers approved a new contract, now amendable on November 14, 2024. Our collective bargaining agreement with our flight attendants is currently amendable and we are in negotiations with the union representing this group. Our collective bargaining agreement with our pilots is amendable on October 31, 2020. See also “Business—Employees.” The outcome of our collective bargaining negotiations cannot presently be determined and the terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. In addition, if we are unable to reach agreement with any of our unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions, stoppages or shortages. Any such action or other labor dispute with unionized employees could disrupt our operations, reduce our profitability or interfere with the ability of our management to focus on executing our business strategies. As a result, our business, results of operations and financial condition may be materially adversely affected based on the outcome of our negotiations with the unions representing our employees.

Changes in law, regulation and government policy have affected, and may in the future have a material adverse effect on our business.

Changes in, and uncertainty with respect to, law, regulation and government policy at the local, state or federal level have affected, and may in the future significantly impact, our business and the airline industry. For example, the Tax Cuts and Jobs Act, enacted on December 22, 2017, limits deductions for borrowers for net interest expense on debt. Changes to law, regulations or government policy that could have a material impact on us in the future include, but are not limited to, infrastructure renewal programs; changes to operating and maintenance requirements; foreign and domestic changes in customs, immigration and security policy and requirements that impede travel into or out of the United States; modifications to international trade policy, including withdrawing from trade agreements and imposing tariffs; changes to consumer protection laws; changes to financial legislation, including the partial or full repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank Act; public company reporting requirements; environmental regulation and antitrust enforcement. Any such changes could make it more difficult and/or more expensive for us to obtain new aircraft or engines and parts to maintain existing aircraft or engines or make it less profitable or prevent us from flying to or from some of the destinations we currently serve.

To the extent that any such changes have a negative impact on us or the airline industry, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.

 

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We rely on efficient daily aircraft utilization to address peak demand days of the week and months of the year, which makes us vulnerable to flight delays, flight cancellations or aircraft unavailability.

We aim to optimize our daily aircraft utilization rate by tailoring service to customer demand patterns, which are seasonal and vary by day of the week. Our average daily aircraft utilization was              hours and 9.7 hours for the years ended December 31, 2019 and 2018, respectively. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers. Part of our business strategy is to efficiently deploy our aircraft, which is achieved in part by higher utilization during the most profitable seasonal periods and days of the week and more limited usage of less expensive aircraft during weak demand periods. Aircraft utilization is reduced by delays and cancellations from various factors, many of which are beyond our control, including air traffic congestion at airports or other air traffic control problems or outages, adverse weather conditions, increased security measures or breaches in security, international or domestic conflicts, terrorist activity, or other changes in business conditions. In addition, pulling aircraft out of service for unscheduled and scheduled maintenance may materially reduce our average fleet utilization or make high cost aircraft unavailable for use and require that we reaccommodate passengers or seek short-term substitute capacity at increased costs. Due to the relatively small size of our fleet and the limited and changing nature of our scheduled service and our point-to-point network, the unexpected unavailability of one or more aircraft and resulting reduced capacity could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to attract and retain qualified personnel at reasonable costs or fail to maintain our company culture, our business could be harmed.

Our business is labor intensive. We require large numbers of pilots, flight attendants, maintenance technicians and other personnel. We compete against other U.S. airlines for pilots, mechanics and other skilled labor and certain U.S. airlines offer wage and benefit packages exceeding ours. The airline industry has from time to time experienced a shortage of qualified personnel. In particular, as more pilots in the industry approach mandatory retirement age, the U.S. airline industry is being affected by a pilot shortage. We and other airlines are also facing shortages of qualified aircraft mechanics and dispatchers. As is common with most of our competitors, we have faced considerable turnover of our employees. As a result of the foregoing, we may not be able to attract or retain qualified personnel or may be required to increase wages and/or benefits in order to do so. If we are unable to hire, train and retain qualified employees, our business could be harmed and we may be unable to implement our growth plans.

In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture. Our company culture, which we believe is one of our competitive strengths, is important to providing dependable customer service and having a productive, accountable workforce that helps keep our costs low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions. Our company culture could otherwise be adversely affected by our growing operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our business, results of operations and financial condition could be harmed.

Our inability to expand or operate reliably or efficiently out of airports where we operate could have a material adverse effect on our business, results of operations and financial condition and brand.

Our results of operations may be affected by actions taken by governmental or other agencies or authorities having jurisdiction over our operations at these airports, including, but not limited to:

 

   

increases in airport rates and charges;

 

   

limitations on take-off and landing slots, airport gate capacity or other use of airport facilities;

 

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termination of our airport use agreements, some of which can be terminated by airport authorities with little notice to us;

 

   

increases in airport capacity that could facilitate increased competition;

 

   

international travel regulations such as customs and immigration;

 

   

increases in taxes;

 

   

changes in law, regulations and government policies that affect the services that can be offered by airlines, in general, and in particular markets and at particular airports;

 

   

restrictions on competitive practices;

 

   

the adoption of statutes or regulations that impact or impose additional customer service standards and requirements, including operating and security standards and requirements; and

 

   

the adoption of more restrictive locally imposed noise regulations or curfews.

Our business is highly dependent on the availability and cost of airport services at the airports where we operate. Any changes in airport operations could have a material adverse effect on our business, results of operations and financial condition.

It has only been a limited period since our current business and operating strategy has been implemented.

Following the implementation of our current business and operating strategy in late 2017 and our acquisition by the Apollo Funds in 2018, we recorded net income of $        million and $25.5 million for the Successor 2019 period and Combined 2018 period, respectively, which are higher levels of net income than we had previously achieved. While we recorded an annual profit for the years ended December 31, 2019 and 2018, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or an annual basis. In turn, this may materially adversely affect our business.

We are subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air (including air emissions associated with the operation of our aircraft), discharges (including storm water discharges) to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. We are or may be subject to new or amended laws and regulations that may have a direct effect (or indirect effect through our third-party providers, including the petroleum industry, or airport facilities at which we operate) on our operations. In addition, U.S. airport authorities are exploring ways to limit de-icing fluid discharges. Any such existing, future, new or potential laws and regulations could have an adverse impact on our business, results of operations and financial condition.

Similarly, we are subject to environmental laws and regulations that require us to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws current and former owners or operators of facilities, as well as generators of waste materials disposed of at such facilities, can be subject to liability for investigation and remediation costs at facilities that have been identified as requiring response actions. Liability under these laws may be strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or compliance with applicable law when the disposal occurred or the amount of wastes directly attributable to us.

In addition, the ICAO and jurisdictions around the world have adopted noise regulations that require all aircraft to comply with noise level standards, and governmental authorities in several U.S. and foreign cities are

 

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considering or have already implemented aircraft noise reduction programs, including the imposition of overnight curfews and limitations on daytime take-offs and landings. Compliance with existing and future environmental laws and regulations, including emissions limitations and more restrictive or widespread noise regulations, that may be applicable to us could require significant expenditures, increase our cost base and have a material adverse effect on our business, results of operations and financial condition, and violations thereof can lead to significant fines and penalties, among other sanctions.

We may participate with other airlines in fuel consortia and fuel committees at our airports where economically beneficial, which agreements generally include cost-sharing provisions and environmental indemnities that are generally joint and several among the participating airlines. Any costs (including remediation and spill response costs) incurred by such fuel consortia could also have an adverse impact on our business, results of operations and financial condition.

Our intellectual property rights, particularly our branding rights, are valuable, and any inability to protect them may adversely affect our business and financial results.

We consider our intellectual property rights, particularly our branding rights such as our trademarks applicable to our airline and Sun Country Rewards program, to be a significant and valuable aspect of our business. We aim to protect our intellectual property rights through a combination of trademark, copyright and other forms of legal protection, contractual agreements and policing of third-party misuses of our intellectual property, but cannot guarantee that such efforts will be successful. Our failure to obtain or adequately protect our intellectual property or any change in law that lessens or removes the current legal protections of our intellectual property may diminish our competitiveness and adversely affect our business and financial results. Any litigation or disputes regarding intellectual property may be costly and time-consuming and may divert the attention of our management and key personnel from our business operations, either of which may adversely affect our business and financial results.

Negative publicity regarding our customer service could have a material adverse effect on our business, results of operations and financial condition.

Our business strategy includes the differentiation of our brand and product from the other U.S. airlines, including LCCs and ULCCs, in order to increase customer loyalty and drive future ticket sales. We intend to accomplish this by continuing to offer passengers dependable customer service. However, in the past, we have experienced customer complaints related to, among other things, product and pricing changes related to our business strategy and customer service. In particular, we have generally experienced a higher volume of complaints when we implemented changes to our unbundling policies, such as charging for seats and baggage. These complaints, together with reports of lost baggage, delayed and cancelled flights, and other service issues, are reported to the public by the DOT. In addition, we could become subject to complaints about our booking practices. If we do not meet our customers’ expectations with respect to reliability and service, our brand and product could be negatively impacted, which could result in customers deciding not to fly with us and adversely affect our business and reputation. We recently entered into agreements for bus service to transport passengers to our MSP hub. If these operators suffer a service problem, safety failure or accident, our brand would be negatively impacted.

Our reputation and brand could be harmed if we were to experience significant negative publicity, including through social media.

We operate in a public-facing industry with significant exposure to social media. Negative publicity, whether or not justified, can spread rapidly through social media. To the extent that we are unable to respond timely and appropriately to negative publicity, our reputation and brand can be harmed. Damage to our overall reputation and brand could have a negative impact on our financial results.

 

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We are highly dependent upon our cash balances, operating cash flows and availability under our Asset-Based Revolving Credit Facility, or ABL Facility.

As of December 31, 2019, our principal sources of liquidity were cash and cash equivalents of $         million, availability under our ABL Facility of $        million and availability under the 2019-01 EETC (as defined below) of $         million. In addition, we had restricted cash of $        million as of December 31, 2019. Restricted cash includes cash received as prepayment for chartered flights that is maintained in separate escrow accounts, from which the restrictions are released once transportation is provided. Our ABL Facility is not adequate to finance our operations, and thus we will continue to be dependent on our operating cash flows and cash balances to fund our operations, provide capital reserves and make scheduled payments on our aircraft-related fixed obligations. If we fail to generate sufficient funds from operations to meet our operating cash requirements or do not have access to availability under the ABL Facility, or other sources of borrowings or equity financing, we could default on our operating leases and fixed obligations. Our inability to meet our obligations as they become due would have a material adverse effect on our business, results of operations and financial condition.

Our liquidity would be adversely impacted, potentially materially, in the event one or more of our credit card processors were to impose holdback restrictions for payments due to us from credit card transactions.

We currently have agreements with organizations that process credit card transactions arising from purchases of air travel tickets by our customers. Credit card processors may have financial risk associated with tickets purchased for travel which can occur several weeks after the purchase. As of December 31, 2018, we were not subject to any credit card holdbacks under our credit card processing agreements, although if we fail to meet certain liquidity and other financial covenants, our credit card processors have the right to hold back credit card remittances to cover our obligations to them. If our credit card processors were to impose holdback restrictions on us, the negative impact on our liquidity could be significant which could have a material adverse effect on our business, results of operations and financial condition.

Our ability to obtain financing or access capital markets may be limited.

We have obligations to purchase aircraft and spare engines, and our current strategy is to rely on lessors or access to capital markets to provide financing for our aircraft acquisition needs. There are a number of factors that may affect our ability to raise financing or access the capital markets in the future, including our liquidity and credit status, our operating cash flows, market conditions in the airline industry, U.S. and global economic conditions, the general state of the capital markets and the financial position of the major providers of commercial aircraft financing. We cannot assure you that we will be able to source external financing for our planned aircraft acquisitions or for other significant capital needs, and if we are unable to source financing on acceptable terms, or unable to source financing at all, our business could be materially adversely affected. To the extent we finance our activities with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our business strategy or otherwise constrain our growth and operations.

Our maintenance costs will fluctuate over time, we will periodically incur substantial maintenance costs due to the maintenance schedules of our aircraft fleet and obligations to the lessors and we could incur significant maintenance expenses outside of such maintenance schedules in the future.

We have substantial maintenance expense obligations, including with respect to our aircraft operating leases. Prior to an aircraft being returned in connection with an operating lease, we will incur costs to restore these aircraft to the condition required by the terms of the underlying operating leases. The amount and timing of these so-called “return conditions” costs can prove unpredictable due to uncertainty regarding the maintenance status of each particular aircraft at the time it is to be returned and it is not unusual for disagreements to ensue between the airline and the leasing company as to the required redelivery conditions on a given aircraft or engine.

 

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Outside of scheduled maintenance, we incur from time to time unscheduled maintenance which is not forecast in our operating plan or financial forecasts, and which can impose material unplanned costs and the loss of flight equipment from revenue service for a significant period of time. For example, a single unplanned engine event can require a shop visit costing several million dollars and cause the engine to be out of service for a number of weeks.

Furthermore, the terms of our lease agreements require us to pay maintenance reserves to the lessor in advance of the performance of major maintenance, resulting in our recording significant prepaid deposits on our balance sheet, and there are restrictions on the extent to which such maintenance reserves are available for reimbursement. In addition, the terms of any lease agreements that we enter into in the future could also require maintenance reserves in excess of our current requirements. Any significant increase in maintenance and repair expenses would have a material adverse effect on our business, results of operations and financial condition. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Aircraft Maintenance.

We have a significant amount of aircraft-related fixed obligations that could impair our liquidity and thereby harm our business, results of operations and financial condition.

The airline business is capital intensive. As of December 31, 2018, our 30 aircraft fleet consisted of 22 aircraft financed under operating leases (including three seasonal leases), five aircraft financed under capital leases and three aircraft financed under secured debt arrangements. For the years ended December 31, 2019 and 2018, we incurred a total of $        and $67.2 million, respectively, for aircraft operating lease payments, capital lease payments and cash interest and principal payments related to aircraft debt. Additionally, we paid maintenance deposits of $         million and $31.2 million, respectively. As of December 31, 2018, we had future aircraft operating lease obligations of approximately $228.5 million and future principal debt obligations of $58.4 million, and we had future capital lease obligations of approximately $136.1 million. Our ability to pay the fixed costs associated with our contractual obligations will depend on our operating performance, cash flow, availability under our ABL Facility and our ability to secure adequate future financing, which will in turn depend on, among other things, the success of our current business strategy and our future financial and operating performance, competitive conditions, fuel price volatility, any significant weakening or improving in the U.S. economy, availability and cost of financing, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our aircraft-related fixed obligations could have a material adverse effect on our business, results of operations and financial condition and could:

 

   

require a substantial portion of cash flow from operations be used for operating lease and maintenance deposit payments and interest expense, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;

 

   

make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments;

 

   

reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with lower fixed payment obligations; and

 

   

cause us to lose access to one or more aircraft and forfeit our maintenance and other deposits if we are unable to make our required aircraft lease rental payments and our lessors exercise their remedies under the lease agreement, including cross-default provisions in certain of our leases.

 

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There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all. A failure to pay our operating lease, debt and other fixed cost obligations or a breach of our contractual obligations, including our ABL Facility, could result in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to cure our breach, fulfill our obligations, make required lease payments or otherwise cover our fixed costs and our secured lenders could foreclose against the assets securing the indebtedness owing to them, which would have a material adverse effect on our business, results of operations and financial condition.

We depend on a sole-source supplier for the majority of our aircraft parts and any supply disruption could have a material adverse effect on our business.

We have entered into a contract with a provider for the vast majority of our aircraft parts. We are vulnerable to any problems associated with the performance of this provider’s obligations to supply our aircraft parts, including design defects, mechanical problems and regulatory issues associated with engines and other parts. If this provider experiences a significant business challenge, disruption or failure due to issues such as financial difficulties or bankruptcy, regulatory or quality compliance issues, or other financial, legal, regulatory or reputational issues, ceases to produce our aircraft parts, is unable to effectively deliver our aircraft parts on timelines and at the prices we have negotiated, or terminates the contract, we would incur substantial transition costs and we would lose the cost benefits from our current arrangement with this provider, which would have a material adverse effect on our business, results of operations and financial condition.

Reduction in demand for air transportation, or governmental reduction or limitation of operating capacity, in the domestic United States, Mexico, Caribbean or Canada markets could harm our business, results of operations and financial condition.

A significant portion of our operations are conducted to and from the domestic United States, Mexico, Caribbean or Canada markets. Our business, results of operations and financial condition could be harmed if we lose our authority to fly to these markets, by any circumstances causing a reduction in demand for air transportation, or by governmental reduction or limitation of operating capacity, in these markets, such as adverse changes in local economic or political conditions, negative public perception of these destinations, unfavorable weather conditions, public health concerns, civil unrest, violence or terrorist-related activities. Furthermore, our business could be harmed if jurisdictions that currently limit competition allow additional airlines to compete on routes we serve.

We are subject to extensive regulation by the FAA, the DOT, the TSA, CBP and other U.S. and foreign governmental agencies, compliance with which could cause us to incur increased costs and adversely affect our business, results of operations and financial condition.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that impose significant costs. In the last several years, Congress has passed laws and the FAA, DOT and TSA have issued regulations, orders, rulings and guidance relating to the operation, safety, and security of airlines that have required significant expenditures. We expect to continue to incur expenses in connection with complying with such laws and government regulations, orders, rulings and guidance. Additional laws, regulations, taxes and increased airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. For example, the FAA Reauthorization Act of 2018 directed the FAA to issue rules establishing minimum dimensions for passenger seats, including seat pitch, width and length. If adopted, these measures could have the effect of raising ticket prices, reducing revenue, and increasing costs.

For example, the DOT has broad authority over airlines and their consumer and competitive practices, and has used this authority to issue numerous regulations and pursue enforcement actions, including rules and fines

 

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relating to the handling of lengthy tarmac delays, consumer notice requirements, consumer complaints, price and airline advertising, distribution, oversales and involuntary denied boarding process and compensation, ticket refunds, liability for loss, delay or damage to baggage, customer service commitments, contracts of carriage and the transportation of passengers with disabilities. Among these is the series of Enhanced Airline Passenger Protection rules issued by the DOT. In addition, the adoption of FAR Part 117 in 2014 modified required pilot rest periods and work hours and Congress has enacted a law and the FAA issued regulations requiring U.S. airline pilots to have a minimum number of hours as a pilot in order to qualify for an Air Transport Pilot certificate which all pilots on U.S. airlines must obtain. Furthermore, in October 2018, Congress passed the FAA Reauthorization Act of 2018, which extends FAA funds through fiscal year 2023. The legislation contains provisions which could have effects on our results of operations and financial condition. Among other provisions, the new law requires the DOT to clarify that, with respect to a passenger who is involuntarily denied boarding as a result of an oversold flight, there is no maximum level of compensation an air carrier may pay to such passenger and the compensation levels set forth in the regulations are the minimum levels of compensation an air carrier must pay to such a passenger, and to create new requirements for the treatment of disabled passengers. In addition it provides that the maximum civil penalty amount for damage to wheelchairs and other mobility aids or for injuring a disabled passenger may be trebled. The FAA must issue rules establishing minimum dimensions for passenger seats, including seat pitch, width and length. The FAA Reauthorization Act of 2018 also establishes new rest requirements for flight attendants and requires, within one year, that the FAA issue an order requiring installation of a secondary cockpit barrier on each new aircraft. The FAA Reauthorization Act of 2018 also provides for several other new requirements and rulemakings related to airlines, including but not limited to: (i) prohibition on voice communication cell phone use during certain flights, (ii) insecticide use disclosures, (iii) new training policy best practices for training regarding racial, ethnic, and religious non-discrimination, (iv) training on human trafficking for certain staff, (v) departure gate stroller check-in, (vi) the protection of pets on airplanes and service animal standards, (vii) requirements to refund promptly to passengers any ancillary fees paid for services not received, (viii) consumer complaint process improvements, (ix) pregnant passenger assistance, (x) restrictions on the ability to deny a revenue passenger permission to board or involuntarily remove such passenger from the aircraft, (xi) minimum customer service standards for large ticket agents, (xii) information publishing requirements for widespread disruptions and passenger rights, (xiii) submission of plans pertaining to employee and contractor training consistent with the Airline Passengers with Disabilities Bill of Rights, (xiv) ensuring assistance for passengers with disabilities, (xv) flight attendant duty period limitations and rest requirements, including submission of a fatigue risk management plan, (xvi) submission of policy concerning passenger sexual misconduct and (xvii) development of Employee Assault Prevention and Response Plan related to the customer service agents. Furthermore, in September 2019, the FAA published an Advance Notice of Proposed Rulemaking regarding flight attendant duty period limitations and rest requirements. Failure to remain in full compliance with these rules may subject us to fines or other enforcement action. FAR Part 117 and the minimum pilot hour requirements may also reduce our ability to meet flight crew staffing requirements.

We cannot assure you that compliance with these and other laws, regulations, orders, rulings and guidance will not have a material adverse effect on our business, results of operations and financial condition.

Compliance with the laws, regulations, orders, rulings and guidance applicable to the airline industry may increase our costs, which could have a material adverse effect on our business. For example, if our current standards do not meet the FAA’s rules regarding minimum dimensions for passenger seats, the number of seats on our aircraft would be reduced and our operating costs would increase.

In addition, the TSA imposes security procedures and requirements on U.S. airports and airlines serving U.S. airports, some of which are funded by a security fee imposed on passengers and collected by airlines, which impedes our ability to stimulate demand through low fares. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements.

 

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Our ability to operate as an airline is dependent on our obtaining and maintaining authorizations issued to us by the DOT and the FAA. The FAA has the authority to issue mandatory orders relating to, among other things, operating aircraft, the grounding of aircraft, maintenance and inspection of aircraft, installation of new safety-related items, and removal and replacement of aircraft parts that have failed or may fail in the future. A decision by the FAA to ground, or require time-consuming inspections of or maintenance on, our aircraft, for any reason, could negatively affect our business, results of operations and financial condition. Federal law requires that air carriers operating scheduled service be continuously “fit, willing and able” to provide the services for which they are licensed. Our “fitness” is monitored by the DOT, which considers managerial competence, operations, finances, and compliance record. In addition, under federal law, we must be a U.S. citizen (as determined under applicable law). Please see “Business—Foreign Ownership.” While the DOT has seldom revoked a carrier’s certification for lack of fitness, such an occurrence would render it impossible for us to continue operating as an airline. The DOT may also institute investigations or administrative proceedings against airlines for violations of regulations.

International routes are regulated by air transport agreements and related agreements between the United States and foreign governments. Our ability to operate international routes is subject to change because the applicable agreements between the United States and foreign governments may be amended from time to time. Our access to new international markets may be limited by the applicable air transport agreements between the U.S. and foreign governments and our ability to obtain the necessary authority from the U.S. and foreign governments to fly the international routes. In addition, our operations in foreign countries are subject to regulation by foreign governments and our business may be affected by changes in law and future actions taken by such governments, including granting or withdrawal of government approvals and airport slots and restrictions on competitive practices. We are subject to numerous foreign regulations in the countries outside the United States where we currently provide service. If we are not able to comply with this complex regulatory regime, our business could be significantly harmed. Please see “Business—Government Regulation.

Our business could be materially adversely affected if we lose the services of our key personnel.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. In particular, we depend on the services of our senior management team, particularly Jude Bricker, our Chief Executive Officer, and Dave Davis, our President and Chief Financial Officer. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager, or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-man life insurance on our management team.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members or executive officers.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, the Dodd-Frank Act, related rules implemented or to be implemented by the Securities and Exchange Commission, or the SEC, and the listing rules of the             . The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board

 

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committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, our Class A common stock could be delisted, and we could be subject to fines, sanctions and other regulatory action and potentially civil litigation.

Our quarterly results of operations fluctuate due to a number of factors, including seasonality.

We expect our quarterly results of operations to continue to fluctuate due to a number of factors, including our seasonal operations, competitive responses in key locations or routes, price changes in aircraft fuel and the timing and amount of maintenance expenses. As a result of these and other factors, quarter-to-quarter comparisons of our results of operations and month-to-month comparisons of our key operating statistics may not be reliable indicators of our future performance. Seasonality may cause our quarterly and monthly results to fluctuate since historically our passengers tend to fly more during the winter months and less in the summer and fall months. We cannot assure you that we will find profitable markets in which to operate during the off-peak season. Lower demand for air travel during the fall and other off-peak months could have a material adverse effect on our business, results of operations and financial condition.

We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including commercial, employment, class action, whistleblower, patent, product liability and other litigation and claims, and governmental and other regulatory investigations and proceedings. In particular, in recent years, there has been significant litigation in the United States and abroad involving airline consumer complaints. We have in the past faced, and may face in the future, claims by third parties that we have violated a passenger’s rights. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, results of operations and financial condition.

Risks Related to this Offering and Ownership of Our Class A Common Stock

Our stock price may fluctuate significantly and purchasers of our Class A common stock could incur substantial losses.

The market price of our Class A common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Class A common stock, you could lose a substantial part or all of your investment in our Class A common stock. The following factors could affect our stock price:

 

   

our operating and financial performance and prospects;

 

   

quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues;

 

   

the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

   

strategic actions by our competitors;

 

   

changes in operating performance and the stock market valuations of other companies;

 

   

announcements related to litigation;

 

   

our failure to meet revenue or earnings estimates made by research analysts or other investors;

 

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changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

   

speculation in the press or investment community;

 

   

sales of our Class A common stock by us or our stockholders, or the perception that such sales may occur;

 

   

changes in accounting principles, policies, guidance, interpretations, or standards;

 

   

additions or departures of key management personnel;

 

   

actions by our stockholders;

 

   

general market conditions;

 

   

domestic and international economic, legal and regulatory factors unrelated to our performance;

 

   

material weakness in our internal control over financial reporting; and

 

   

the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition, and results of operations.

We are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging growth companies,” which could make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies.” These exemptions include not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, (iii) the last day of our fiscal year following the fifth anniversary of the date of this offering, and (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Class A common stock and our stock price may decline or become more volatile and it may be difficult for us to raise additional capital if and when we need it.

 

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We will incur significant costs and devote substantial management time as a result of operating as a public company, particularly after we are no longer an “emerging growth company.”

As a public company, we will continue to incur significant legal, accounting and other expenses. For example, we will be required to comply with the requirements of Section 404(a) of the Sarbanes-Oxley Act and the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC, and              , our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. The rules governing management’s assessment of our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue incurring significant expenses and devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our consolidated financial statements and fail to meeting our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the             , regulatory investigations, civil or criminal sanctions and litigation, any of which would have a material adverse effect on our business, results of operations and financial condition.

However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

We are continuing to improve our internal control over financial reporting.

Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company,” as defined in the JOBS Act, which at the latest would be the end of the fiscal year following the fifth anniversary of this offering. At such time, our internal control over financial reporting may be insufficiently documented, designed or operating, which may cause our independent registered public accounting firm to issue a report that is adverse.

 

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Our certificate of incorporation and bylaws include provisions limiting ownership and voting by non-U.S. citizens.

To comply with restrictions imposed by federal law on foreign ownership and control of U.S. airlines, our certificate of incorporation and bylaws will restrict ownership and control of shares of our common stock by non-U.S. citizens. The restrictions imposed by federal law currently require that we be owned and controlled by U.S. citizens, that no more than 25.0% of our voting stock be owned or controlled, directly or indirectly, by persons or entities who are not U.S. citizens, as defined in 49 U.S.C. § 40102(a)(15), that no more than 49.0% of our stock be owned or controlled, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the United States, that our president and at least two-thirds of the members of our board of directors and other managing officers be U.S. citizens and that we be under the actual control of U.S. citizens. Our certificate of incorporation and bylaws will provide that the failure of non-U.S. citizens to register their shares on a separate stock record, which we refer to as the “foreign stock record,” would result in a loss of their voting rights in the event and to the extent that the aggregate foreign ownership of the outstanding common stock exceeds the foreign ownership restrictions imposed by federal law. Our bylaws will further provide that no shares of our common stock will be registered on the foreign stock record if the amount so registered would exceed the foreign ownership restrictions imposed by federal law. If it is determined that the amount registered in the foreign stock record exceeds the foreign ownership restrictions imposed by federal law, shares will be removed from the foreign stock record, resulting in the loss of voting rights, in reverse chronological order based on the date of registration therein, until the number of shares registered therein does not exceed the foreign ownership restrictions imposed by federal law.

In addition, only U.S. citizens may purchase shares in this offering. By participating in this offering, you will be deemed to represent that you are a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15). The restrictions on ownership and control of shares of our common stock could materially limit your ability to resell any shares you purchase in this offering and could adversely impact the price that investors might be willing to pay in the future for shares of our Class A common stock.

We continue to be controlled by the Apollo Funds, and Apollo’s interests may conflict with our interests and the interests of other stockholders.

Following this offering, the Apollo Funds will beneficially own approximately      % of the voting power of our outstanding common equity (or approximately     % if the underwriters exercise their option to purchase additional shares in full), in part due to the voting power of the one share of Class B common stock to be issued to one of the Apollo Funds in connection with the Corporate Conversion. An affiliate of Apollo, as the holder of our one share of Class B common stock, will be entitled to a number of votes equal to the number of shares of Class A common stock issuable upon the full exercise of the outstanding Apollo Warrants at the time of such vote. As a result, the Apollo Funds will have the power to elect a majority of our directors. Therefore, individuals affiliated with Apollo will have effective control over the outcome of votes on all matters requiring approval by our stockholders, including entering into significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets and issuance of additional debt or equity. The interests of Apollo and its affiliates, including the Apollo Funds, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by the Apollo Funds could delay, defer, or prevent a change in control of our company or impede a merger, takeover, or other business combination which may otherwise be favorable for us. Additionally, Apollo and its affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor. So long as the Apollo Funds continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, the Apollo Funds will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. In addition,

 

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we have an executive committee that serves at the discretion of our Board and is composed of two members nominated by the Apollo Funds and our CEO, who are authorized to take actions (subject to certain exceptions) that it reasonably determines are appropriate. See Management—Board Committees—Executive Committee” for a further discussion.

We cannot predict the impact our dual class structure may have on the market price of our Class A common stock.

We cannot predict whether our dual class structure, combined with the concentrated control of the Apollo Funds, will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, in July 2017, FTSE Russell and S&P Dow Jones announced changes to their eligibility criteria for the inclusion of shares of public companies on certain indices, including the Russell 2000, the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, to exclude companies with multiple classes of shares of common stock from being added to these indices. As a result, our dual class capital structure would make us ineligible for inclusion in any of these indices, and mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. Furthermore, we cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.

We are a “controlled company” within the meaning of the      rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, the Apollo Funds will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the              corporate governance standards. Under the         rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

   

a majority of the board of directors consist of independent directors;

 

   

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

We intend to utilize these exemptions as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the         .

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium on their shares.

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

   

providing that our board of directors will be divided into three classes, with each class of directors serving staggered three-year terms;

 

   

prohibiting cumulative voting in the election of directors;

 

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providing for the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if less than 50.1% of the voting power of our outstanding common stock is beneficially owned by the Apollo Funds;

 

   

empowering only the board to fill any vacancy on our board of directors (other than in respect of an Apollo Director (as defined below)), whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

prohibiting stockholders from acting by written consent if less than 50.1% of the voting power of our outstanding common stock is beneficially owned by the Apollo Funds;

 

   

to the extent permitted by law, prohibiting stockholders from calling a special meeting of stockholders if less than 50.1% of the voting power of our outstanding common stock is beneficially owned by the Apollo Funds; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Additionally, our certificate of incorporation provides that we are not governed by Section 203 of the DGCL, which, in the absence of such provisions, would have imposed additional requirements regarding mergers and other business combinations. However, our certificate of incorporation will include a provision that restricts us from engaging in any business combination with an interested stockholder for three years following the date that person becomes an interested stockholder, but such restrictions shall not apply to any business combination between Apollo and any affiliate thereof or their direct and indirect transferees, on the one hand, and us, on the other.

Any issuance by us of preferred stock could delay or prevent a change in control of us. Our board of directors will have the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices, and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring, or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

In addition, as long as the Apollo Funds beneficially own a majority of the voting power of our outstanding common stock, the Apollo Funds will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and certain corporate transactions. Together, these certificate of incorporation, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our Class A common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by the Apollo Funds and their right to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our Class A common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your Class A common stock in an acquisition. For a further discussion of these and other such anti-takeover provisions, see “Description of Capital Stock—Certain Corporate Anti-takeover Provisions.

 

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Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or of our certificate of incorporation or our bylaws, or (iv) any action asserting a claim related to or involving the Company that is governed by the internal affairs doctrine.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions of our certificate of incorporation described above. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings. If a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Under our certificate of incorporation, none of Apollo, its affiliated funds, the portfolio companies owned by such funds, any affiliates of Apollo, or any of their respective officers, directors, agents, stockholders, members or partners, will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities, or lines of business in which we operate. In addition, our certificate of incorporation provides that, to the fullest extent permitted by law, no officer or director of ours who is also an officer, director, employee, managing director or other affiliate of Apollo will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to Apollo, instead of us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, managing director, or other affiliate has directed to Apollo. For instance, a director of our company who also serves as a director, officer, or employee of Apollo or any of its portfolio companies, funds, or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. Upon consummation of this offering, our board of directors will consist of nine members,              of whom will be Apollo Directors. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations, or prospects if attractive corporate opportunities are allocated by Apollo to itself or its affiliated funds, the portfolio companies owned by such funds or any affiliates of Apollo instead of to us. A description of our obligations related to corporate opportunities under our certificate of incorporation are more fully described in “Description of Capital Stock—Corporate Opportunity.”

We are a holding company and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers, including for payments in respect of our indebtedness, from our subsidiaries to meet our obligations. The agreements governing the indebtedness of

 

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our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

Investors in this offering will experience immediate and substantial dilution.

Based on our pro forma as adjusted net tangible book value (deficit) per share as of December 31, 2019 and an initial public offering price of $         per share, we expect that purchasers of our Class A common stock in this offering will experience an immediate and substantial dilution of $         per share, or $         per share if the underwriters exercise their option to purchase additional shares in full, representing the difference between our pro forma as adjusted net tangible book value (deficit) per share and the initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See Dilution.”

Our future earnings and earnings per share, as reported under GAAP, could be adversely impacted by the warrants granted to Amazon. If Amazon exercises its right to acquire shares of our Class A common stock pursuant to the 2019 Warrants, this will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our Class A common stock.

The warrants granted to Amazon increase the number of diluted shares reported, which has an effect on our fully diluted earnings per share. Further, the 2019 Warrants are presented as liabilities in our consolidated balance sheet and are subject to fair value measurement adjustments during the periods that they are outstanding. Accordingly, future fluctuations in the fair value of the 2019 Warrants could have a material adverse effect on our results of operations. In addition, the majority of the 2019 Warrants will vest incrementally based on aggregate global payments by Amazon to the Company or its affiliates pursuant to the ATSA, or in certain circumstances immediately. If additional 2019 Warrants vest and Amazon exercises its right to acquire shares of our Class A common stock pursuant to the 2019 Warrants, which exercise (just like an investment in our company generally) is subject to limitations imposed by federal law on foreign ownership and control of U.S. airlines (see “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners”), it will dilute the ownership interests of our then-existing stockholders and reduce our earnings per share. In addition, any sales in the public market of any Class A common stock issuable upon the exercise of the 2019 Warrants could adversely affect prevailing market prices of our Class A common stock.

You may be diluted by the future issuance of additional Class A common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.

After the completion of this offering, we will have              shares of Class A common stock authorized but unissued (assuming no exercise of the underwriters’ option to purchase additional shares). Our certificate of incorporation will authorize us to issue these shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. At the closing of this offering, we will have approximately             options outstanding, which are exercisable into approximately              shares of Class A common stock, and warrants outstanding, which are exercisable for approximately     shares of Class A common stock, subject to limitations imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners.” Of the             2019 Warrants, approximately     % have vested and the remainder will vest incrementally based on aggregate global payments by Amazon to the Company or its affiliates pursuant to the ATSA. We have reserved approximately             shares for future grant under our Omnibus Equity Plan. See Executive Compensation—Equity Compensation Plans—2020 Omnibus Incentive Plan.” Any Class A

 

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common stock that we issue, including under our Omnibus Equity Plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options or warrants would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

From time to time in the future, we may also issue additional shares of our Class A common stock or securities convertible into Class A common stock pursuant to a variety of transactions, including acquisitions. Our issuance of additional shares of our Class A common stock or securities convertible into our Class A common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our Class A common stock.

Our ABL Facility contains restrictions that limit our flexibility.

Our ABL Facility contains, and any future indebtedness of ours could also contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our and our subsidiaries’ ability to, among other things:

 

   

incur additional debt, guarantee indebtedness, or issue certain preferred equity interests;

 

   

pay dividends on or make distributions in respect of, or repurchase or redeem, our capital stock, or make other restricted payments;

 

   

prepay, redeem, or repurchase certain debt;

 

   

make loans or certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets;

 

   

consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates;

 

   

alter the businesses we conduct;

 

   

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. These restrictive covenants may limit our ability to engage in activities that may be in our long-term best interest. The failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.

Future sales of our Class A common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.

After the completion of this offering and the use of proceeds therefrom, we will have              shares of Class A common stock and warrants to purchase              shares of Class A common stock outstanding. The number of outstanding shares of Class A common stock includes              shares beneficially owned by the Apollo Funds and certain of our employees, that are “restricted securities,” as defined under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and eligible for sale in the public market subject to the requirements of Rule 144. We, each of our officers and directors, affiliates of Apollo and all of our other existing stockholders have agreed that (subject to certain exceptions), for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of certain underwriters, dispose of any shares of Class A common stock or any securities convertible into or exchangeable for our Class A common stock. See

 

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Underwriting.” Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our Class A common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods, and other limitations of Rule 144. The underwriters may, in their sole discretion, release all or any portion of the shares subject to lock-up agreements at any time and for any reason. In addition, the Apollo Funds have certain rights to require us to register the sale of Class A common stock held by the Apollo Funds including in connection with underwritten offerings. Sales of significant amounts of stock in the public market upon expiration of lock-up agreements, the perception that such sales may occur, or early release of any lock-up agreements, could adversely affect prevailing market prices of our Class A common stock or make it more difficult for you to sell your shares of Class A common stock at a time and price that you deem appropriate. See Shares Eligible for Future Sale” for a discussion of the shares of Class A common stock that may be sold into the public market in the future.

There has been no prior public market for our Class A common stock and there can be no assurances that a viable public market for our Class A common stock will develop or be sustained.

Prior to this offering, our Class A common stock was not traded on any market. An active, liquid and orderly trading market for our Class A common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot predict the extent to which investor interest in our Class A common stock will lead to the development of an active trading market on             or otherwise or how liquid that market might become. The initial public offering price for the Class A common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See Underwriting.” If an active public market for our Class A common stock does not develop, or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you or at all.

The initial public offering price of our Class A common stock may not be indicative of the market price of our Class A common stock after this offering.

The initial public offering price was determined by negotiations between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriting,” and may not be indicative of the market price of our Class A common stock after this offering. If you purchase our Class A common stock, you may not be able to resell those shares at or above the initial public offering price.

We do not anticipate paying dividends on our Class A common stock in the foreseeable future.

We do not anticipate paying any dividends in the foreseeable future on our Class A common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. Our ABL Facility contains, and any future indebtedness likely will contain, restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to pay dividends and make other restricted payments. As a result, capital appreciation, if any, of our Class A common stock may be your major source of gain for the foreseeable future. While we may change this policy at some point in the future, we cannot assure you that we will make such a change. See “Dividend Policy.”

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our Class A common stock or if our operating results do not meet their expectations, our stock price could decline.

 

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We may issue preferred securities, the terms of which could adversely affect the voting power or value of our Class A common stock.

Our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred securities having such designations, preferences, limitations, and relative rights, including preferences over our Class A common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred securities could adversely impact the voting power or value of our Class A common stock. For example, we might grant holders of preferred securities the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred securities could affect the residual value of the Class A common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and include, among other things, statements relating to:

 

   

our strategy, outlook and growth prospects;

 

   

our operational and financial targets and dividend policy;

 

   

general economic trends and trends in the industry and markets; and

 

   

the competitive environment in which we operate.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

   

the impact of worldwide economic conditions;

 

   

changes in our fuel cost;

 

   

threatened or actual terrorist attacks, global instability and potential U.S. military actions or activities;

 

   

the competitive environment in our industry;

 

   

factors beyond our control, including air traffic congestion, weather, security measures, travel-related taxes and outbreak of disease;

 

   

our presence in international markets;

 

   

insurance costs;

 

   

changes in restrictions on, or increased taxes applicable to charges for, ancillary products and services;

 

   

air travel substitutes;

 

   

our ability to implement our business strategy successfully;

 

   

our ability to keep costs low;

 

   

our reliance on the Minneapolis/St. Paul market;

 

   

our reputation and business being adversely affected in the event of an emergency, accident or similar public incident involving our aircraft or personnel;

 

   

our reliance on third-party providers and other commercial partners to perform functions integral to our operations.

 

   

operational disruptions;

 

   

our ability to grow or maintain our unit revenues or maintain our ancillary revenues;

 

   

increased labor costs, union disputes, employee strikes and other labor-related disruptions;

 

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governmental regulation;

 

   

our inability to maintain an optimal daily aircraft utilization rate;

 

   

our ability to attract and retain qualified personnel;

 

   

our inability to expand or operate reliably and efficiently out of airports where we maintain a large presence;

 

   

environmental and noise laws and regulations;

 

   

negative publicity regarding our customer service;

 

   

our liquidity and dependence on cash balances and operating cash flows;

 

   

our ability to maintain our liquidity in the event one or more of our credit card processors were to impose holdback restrictions;

 

   

our ability to obtain financing or access capital markets;

 

   

aircraft-related fixed obligations that could impair our liquidity;

 

   

our maintenance obligations;

 

   

our sole-source supplier for our aircraft and engines;

 

   

loss of key personnel; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

These forward-looking statements reflect our views with respect to future events as of the date of this prospectus and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures, or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We expect to receive approximately $        million of net proceeds (based upon the assumed initial public offering price of $        per share, the midpoint of the range set forth on the cover page of this prospectus and assuming no exercise of the underwriters’ option to purchase additional shares) from the sale of the Class A common stock offered by us, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Assuming no exercise of the underwriters’ option to purchase additional shares, each $1.00 increase (decrease) in the public offering would increase (decrease) our net proceeds by approximately $         million. We estimate that the net proceeds to us, if the underwriters exercise their option to purchase the maximum number of additional shares of Class A common stock from us, will be approximately $        million, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering (based upon the assumed initial public offering price of $        per share, the midpoint of the range set forth on the cover page of this prospectus).

We currently expect to use approximately $         million of the proceeds from this offering to pay fees and expenses in connection with this offering, which include legal and accounting fees, SEC and FINRA registration fees, printing expenses, and other similar fees and expenses. We intend to use any remaining proceeds for general corporate purposes. While we currently have no specific plan for the use of the remaining net proceeds of this offering, we anticipate using a significant portion of these proceeds to implement our growth strategies and generate funds for working capital. Our management team will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of any remaining net proceeds will depend upon market conditions, among other factors.

 

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DIVIDEND POLICY

We currently do not intend to pay cash dividends on our Class A common stock in the foreseeable future. However, we may, in the future, decide to pay dividends on our Class A common stock. Any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, and any other factors deemed relevant by our board of directors.

As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries. Our ability to pay dividends will therefore be restricted as a result of restrictions on their ability to pay dividends to us under our ABL Facility and under future indebtedness that we or they may incur. See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2019 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to: (i) the Corporate Conversion and the filing and effectiveness of our certificate of incorporation, which will be in effect immediately prior to the completion of this offering, and (ii) the exercise of outstanding Apollo Warrants for     shares of Class A common stock in connection with this offering; and

 

   

a pro forma as adjusted basis to give further effect to this offering and the application of the net proceeds of this offering as described under “Use of Proceeds.”

You should read this table together with the information included elsewhere in this prospectus, including “Prospectus Summary—Summary Consolidated Financial and Operating Information,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the related notes thereto.

 

     As of December 31, 2019  
     Actual      Pro forma      Pro forma as
adjusted
 
     (in thousands, except share data)  

Cash and cash equivalents

   $                    $                    $                
  

 

 

    

 

 

    

 

 

 

Total debt

   $        $        $    

Stockholders’ Equity:

        

SCA common stock—5,000,000 shares authorized; shares issued and outstanding (actual); no shares issued and outstanding (pro forma and pro forma as adjusted)

        —          —    

Class A common stock—$0.01 par value; no shares authorized, no shares issued and outstanding (actual); shares authorized, shares issued and outstanding (pro forma); shares authorized, shares issued and outstanding (pro forma as adjusted) (1)

     —          

Class B common stock—$0.01 par value; no shares authorized, no shares issued and outstanding (actual); one share authorized, one share issued and outstanding (pro forma); one share authorized, one share issued and outstanding (pro forma as adjusted)

     —          

Preferred stock—$0.01 par value; no shares authorized, no shares issued and outstanding (actual); shares authorized, no shares issued and outstanding (pro forma and pro forma as adjusted)

     —          —          —    

Loans to SCA common stockholders

        —          —    

Additional paid-in capital

        

Retained earnings

        
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

        
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $        $                        $                    
  

 

 

    

 

 

    

 

 

 

 

 

(1)

Following this offering, Apollo Warrants to purchase an aggregate of             shares of Class A common stock will remain outstanding and 2019 Warrants to purchase an aggregate of              shares of Class A common stock, approximately     % of which have vested, will remain outstanding. As is the case for investment in our company generally, the exercise of the Apollo Warrants and 2019 Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners.”

 

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DILUTION

Purchasers of the Class A common stock in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value (deficit) per share of our Class A common stock after this offering.

Our pro forma net tangible book value (deficit) as of December 31, 2019 was $         , or $          per share of our Class A common stock. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets (total assets less goodwill and deferred offering costs) less total liabilities divided by the number of shares of Class A common stock issued and outstanding as of December 31, 2019, after giving effect to the Corporate Conversion and the filing and effectiveness of our certificate of incorporation, which will be in effect immediately prior to the completion of this offering, and the exercise of outstanding Apollo Warrants for    shares of Class A common stock in connection with this offering.

Our pro forma as adjusted net tangible book value (deficit) as of December 31, 2019 was $        , or $        per share of our Class A common stock. Pro forma as adjusted net tangible book value (deficit) per share represents our pro forma net tangible book value (deficit) after giving effect to the sale of    shares of Class A common stock in this offering at the assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus) and the application of the net proceeds from this offering.

The following table illustrates the dilution per share of our Class A common stock, assuming the underwriters do not exercise their option to purchase additional shares of our Class A common stock:

 

Assumed initial public offering price per share

      $            

Pro forma net tangible book value (deficit) per share as of December 31, 2019

     
     

 

 

 

Increase in pro forma net tangible book value (deficit) per share attributable to new investors purchasing shares in this offering

                  
  

 

 

    

Pro forma as adjusted net tangible book value (deficit) per share after this offering

     
     

 

 

 

Dilution per share to new investors purchasing shares in this offering

      $    
     

 

 

 

Dilution per share to new investors purchasing shares in this offering is determined by subtracting pro forma as adjusted net tangible book value (deficit) per share after this offering from the initial public offering price per share of Class A common stock.

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of Class A common stock, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value (deficit) per share after this offering by $         per share and increase (decrease) the dilution to new investors by $         per share, in each case assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $         per share and decrease (increase) the dilution to new investors by approximately $         per share, in each case assuming the assumed initial public offering price of $         per share of Class A common stock remains the same, and after deducting estimated underwriting discounts and commissions.

 

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To the extent the underwriters’ option to purchase additional shares is exercised, there will be further dilution to new investors. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, the pro forma as adjusted net tangible book value (deficit) per share would be $         per share, and the dilution in pro forma as adjusted net tangible book value (deficit) per share to new investors in this offering would be $         per share.

The following table summarizes, as of December 31, 2019, the total number of shares of Class A common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the assumed initial public offering price of $      per share, calculated before deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total
Consideration
    Average
Price
per
Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

                   $                             $            

Investors in the offering

                                               
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $          100   $    

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by new investors by $        , $         and $         per share, respectively.

If the underwriters were to fully exercise their option to purchase additional shares of our Class A common stock, the percentage of Class A common stock held by existing investors would be      %, and the percentage of shares of Class A common stock held by new investors would be     %.

The foregoing tables and calculations, except as otherwise indicated:

 

   

assume the completion of the Corporate Conversion, and as a result, are based on     shares of Class A common stock outstanding as of December 31, 2019;

 

   

assume an initial public offering price of $         per share of Class A common stock, the midpoint of the range set forth on the cover of this prospectus;

 

   

assume no exercise of the underwriters’ option to purchase             additional shares of Class A common stock in this offering;

 

   

assume the exercise of outstanding Apollo Warrants for     shares of Class A common stock in connection with this offering. Following this offering, Apollo Warrants to purchase an aggregate of     shares of Class A common stock will remain outstanding. The exercise of the Apollo Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners”;

 

   

assume no exercise of the 2019 Warrants to purchase an aggregate of     shares of Class A common stock, approximately     % of which have vested. As is the case for investment in our company generally, the exercise of the 2019 Warrants is limited by restrictions imposed by federal law on foreign ownership and control of U.S. airlines. See “Description of Capital Stock—Limited Ownership and Voting by Foreign Owners”;

 

   

do not reflect an additional     shares of our Class A common stock reserved for future grant under the Omnibus Equity Plan. See “Executive Compensation—Equity Compensation Plans—2020 Omnibus Incentive Plan”; and

 

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do not reflect             shares of Class A common stock that may be issued upon the exercise of stock options outstanding as of the consummation of this offering under the SCA Acquisition Equity Plan. The following table sets forth the outstanding stock options under the SCA Acquisition Equity Plan as of December 31, 2019 (assuming the completion of the Corporate Conversion):

 

     Number of
Options(1)
     Weighted-Average
Exercise Price
Per Share
 

Vested stock options (time-based vesting)

      $            

Unvested stock options (time-based vesting)

      $    

Unvested stock options (performance-based vesting)

      $    

 

(1)

Upon a holder’s exercise of one option, we will issue to the holder one share of Class A common stock.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders. To the extent that any outstanding options or warrants to purchase our Class A common stock are exercised, or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present our selected consolidated financial data for the periods indicated. We have derived the selected historical consolidated statement of operations data for the year ended December 31, 2019 and for the periods January 1, 2018 through April 10, 2018 (Predecessor) and April 11, 2018 through December 31, 2018 (Successor) from our audited consolidated financial statements included elsewhere in this prospectus. We have derived our selected historical consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus.

Our combined statement of operations data for the year ended December 31, 2018, which we refer to as the Combined 2018 period, represent the mathematical addition of the Predecessor period from January 1, 2018 through April 10, 2018 and the Successor period from April 11, 2018 to December 31, 2018. This combination does not comply with GAAP, but is presented because our core operations continued throughout 2018 and we believe it provides the most meaningful comparison of our results. This combined data is presented for supplemental purposes only and (1) may not reflect the actual results we would have achieved absent the acquisition, (2) may not be predictive of future results of operations and (3) should not be viewed as a substitute for the financial results of the Successor and Predecessor presented in accordance with GAAP. The significant differences in accounting for the Successor period as compared to the Predecessor period, which were established as part of our acquisition by the Apollo Funds, are in (1) aircraft rent, due to the over-market liabilities related to unfavorable terms of our existing aircraft leases and maintenance reserve payments, which will be amortized on a straight-line basis as a reduction of aircraft rent over the remaining life of each lease, (2) maintenance expenses, due to recognizing a liability (or contra-asset) that will offset expenses for maintenance events incurred by the Successor but paid for by the Predecessor and (3) depreciation and amortization, due to the recognition of our property and equipment and other intangible assets at fair value at the time of the acquisition, which will be amortized through depreciation and amortization on a straight-line basis over their respective useful lives. Please see our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Successor      Successor             Predecessor      Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
            For the period
January 1,
2018 through

April 10, 2018
     For the year
ended

December 31,
2018
 
(in thousands)                                   

Operating Revenues:

                

Passenger

   $                        $ 335,824           $ 172,897      $ 508,721  

Other

        49,107             24,555        73,662  
  

 

 

    

 

 

         

 

 

    

 

 

 

Total Operating Revenue

        384,931             197,452        582,383  
  

 

 

    

 

 

         

 

 

    

 

 

 

Operating Expenses:

                

Aircraft Fuel

        119,553             45,790        165,343  

Salaries, Wages, and Benefits

        90,263             36,964        127,227  

Aircraft Rent(1)

        36,831             28,329        65,160  

Maintenance(2)

        15,491             9,508        24,999  

Sales and Marketing

        17,180             10,854        28,034  

Depreciation and Amortization(3)

        14,405             2,526        16,931  

Ground Handling

        23,828             8,619        32,447  

 

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     Successor      Successor            Predecessor     Combined
2018
 
     For the year
ended

December 31,
2019
     For the period
April 11, 2018
through

December 31,
2018
           For the period
January 1,
2018 through

April 10, 2018
    For the year
ended

December 31,
2018
 
(in thousands)                                 

Landing Fees and Airport Rent

   $                    $ 25,977          $ 10,481     $ 36,458  

Special Items, net

        (6,706          271       (6,435

Other Operating, net

        40,877            17,994       58,871  
  

 

 

    

 

 

        

 

 

   

 

 

 

Total Operating Expenses

        377,699            171,336       549,035  
  

 

 

    

 

 

        

 

 

   

 

 

 

Operating Income

        7,232            26,116       33,348  
  

 

 

    

 

 

        

 

 

   

 

 

 

Non-operating Income (Expense):

              

Interest Income

        258            96       354  

Interest Expense

        (6,060          (339     (6,399

Other, net

        (1,636          37       (1,599
  

 

 

    

 

 

        

 

 

   

 

 

 

Total Non-operating Expense

        (7,438          (206     (7,644

Income (Loss) before Income Tax

        (206          25,910       25,704  
  

 

 

    

 

 

        

 

 

   

 

 

 

Income Tax Expense

        161            —         161  
  

 

 

    

 

 

        

 

 

   

 

 

 

Net Income (Loss)

   $                $ (367        $ 25,910     $ 25,543  
  

 

 

    

 

 

        

 

 

   

 

 

 

Net Income (Loss) per share to common stockholders:

              

Basic and diluted

   $        $ (0.15        $ 0.26    
  

 

 

    

 

 

        

 

 

   

Weighted average shares outstanding:

              

Basic and diluted

        2,472            100,000    

Pro forma Net Income (Loss) per share to common stockholders(4):

              

Basic and diluted

              

Pro forma weighted average shares outstanding:

              

Basic and diluted

              

 

(1)

Aircraft Rent expense for the Successor period is reduced due to amortization of a liability representing lease rates and maintenance reserves which were higher than market terms of similar leases at the time of our acquisition by the Apollo Funds. This liability was recognized at the time of the acquisition and is being amortized into earnings through a reduction of Aircraft Rent on a straight-line basis over the remaining life of each lease. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(2)

Maintenance expense for the Successor period is reduced due to recognizing a liability (or contra-asset) to represent the Successor’s obligation to perform planned maintenance events paid for by the Predecessor on leased aircraft at the date of our acquisition by the Apollo Funds. The liability (or contra-asset) is recognized as a reduction to Maintenance expense as reimbursable maintenance events are performed and maintenance expense is incurred. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(3)

Depreciation and amortization expense increased in the Successor period due to higher fair values for certain acquired assets and to the amortization of definite-lived intangible assets. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(4)

See Note 4 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted pro forma net income (loss) per share to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

 

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     As of December 31,  
     2019      2018  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $                    $ 29,600  

Total assets

        675,832  

Long-term debt and finance lease obligations, including current portion(1)

        58,429  

Stockholders’ equity

        235,647  

 

(1)

Finance lease obligations were formerly referred to as capital lease obligations prior to our adoption of the new leasing standard on January 1, 2019. See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. 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 prospectus titled “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section of this prospectus titled “Cautionary Note Regarding Forward-Looking Statements.”

Overview

Sun Country Airlines is a Minnesota-based high-growth, low-cost air carrier focused on serving leisure passengers on flights throughout the United States and to destinations in Mexico, Central America, the Caribbean and Canada. Sun Country Airlines represents a new breed of hybrid carrier. We operate an agile network consisting of our core scheduled service business and our synergistic and profitable charter business. Our unique model dynamically deploys shared aircraft and flight crews across our service lines to generate superior returns and high margins. We optimize capacity allocation by market, time of year, day of week and line of business by shifting flying to markets during periods of high demand and away from markets during periods of low demand with far greater frequency than other airlines. The only carrier in the United States that flies a similar flexible network to us is Allegiant Travel Company, but Allegiant flies to different markets than we do with a basic product, smaller charter business and limited ticket distribution network through its website. Our model includes many of the low-cost structure characteristics of ULCCs (which include Allegiant Travel Company, Spirit Airlines and Frontier Airlines), such as an unbundled product, 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 an elevated product that we believe is superior to the ULCCs and consistent with that of LCCs (which include Southwest Airlines and JetBlue Airways). For example, our product includes more legroom, free beverages, in-flight entertainment and in-seat power, none of which are offered by the ULCCs. The combination of our agile “peak demand” network with our elevated consumer product allows us to generate higher TRASM than ULCCs while maintaining lower CASM excluding fuel than LCCs.

Our agile “peak demand” scheduling strategy is focused on flexing capacity by day of the week, month of the year and line of business to capture what we believe are the most profitable flying opportunities. Our agility is supported by our variable cost structure and the cross utilization of our people and assets between lines of business. Our agile peak demand strategy allows us to generate higher TRASM by focusing on days with stronger demand.

As part of our business transformation, we have reduced our unit costs by outsourcing our Minneapolis station handling, renegotiating our component maintenance agreement, implementing fuel savings initiatives, reducing catering costs and renegotiating distribution contracts, among other cost-saving initiatives. We keep our aircraft ownership costs low by purchasing mid-life Boeing 737 aircraft, which have a lower purchase price than comparable new Boeing 737 aircraft. We operate a single family aircraft fleet which has both operational and cost advantages, such as allowing for optimization of crew scheduling and training and lower maintenance costs. In part due to our cost saving initiatives, our CASM excluding fuel has decreased from 7.79 cents for the year ended December 31, 2017 to     cents for the year ended December 31, 2019. We are focused on continuous cost rationalization and identifying potential redundancies or inefficiencies in our operations. Our unique business model and strategy positions us well to maintain and improve our low CASM despite having lower utilization rates than most of our peers.

In December 2019, we entered into the ATSA with Amazon to provide air cargo transportation services. We expect that the ATSA will result in various benefits including, among others, growth in revenues, improved cash flows and operating efficiencies. In addition, we expect to further expand our fleet and take delivery of 10 additional Boeing 737-800 aircraft provided by Amazon between the second quarter and the third quarter of

 

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2020. Achieving the anticipated benefits from the agreement is subject to a number of challenges and uncertainties, such as unforeseen maintenance and other costs and our ability to hire pilots, crew and other personnel necessary to support the Amazon operations. We plan to allocate resources towards the Amazon operations during the ramp up period, which is expected to extend through the fourth quarter of 2020. Pursuant to the agreement, we are entitled to receive from Amazon upfront payments towards start-up costs, a portion of which will be received in 2019, in addition to fixed monthly payments per aircraft and variable payments based on block hours flown. We have not historically had any significant cargo operations, nor have we had main deck cargo operations, however, we expect to leverage our core operations and operational capabilities in executing the additional services for Amazon.

Basis of Presentation

On April 11, 2018, MN Airlines, LLC was acquired by the Apollo Funds. As a result of the change of control, the acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that our assets and liabilities be recognized on the consolidated balance sheet at their fair value as of the acquisition date. Accordingly, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether they relate to the period preceding the acquisition or the period succeeding the acquisition, respectively. Additionally, in May 2019, we converted the operating entity of the airline from MN Airlines, LLC d/b/a Sun Country Airlines to Sun Country, Inc. d/b/a Sun Country Airlines.

We have presented results of operations, including the related discussion and analysis, for the year ended December 31, 2019 (“Successor 2019 period”) compared to the combined periods from January 1, 2018 through April 10, 2018 (“Predecessor 2018 period”) and April 11, 2018 through December 31, 2018 (“Successor 2018 period”). The comparability of the Successor 2019 period to the Successor 2018 and Predecessor 2018 period may be impacted due to the recognition of assets and liabilities at their fair value at the acquisition date. The new basis of accounting primarily impacted the values of our property and equipment, leased aircraft, maintenance reserves and intangible assets, resulting in increased depreciation and amortization and decreased aircraft rent and maintenance expenses. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

This combination of the Predecessor 2018 period and the Successor 2018 period does not comply with GAAP, but is presented because our core operations continued throughout 2018 and we believe it provides the most meaningful comparison of our results. This combined data is presented for supplemental purposes only and (1) may not reflect the actual results we would have achieved absent the acquisition, (2) may not be predictive of future results of operations, and (3) should not be viewed as a substitute for the financial results of the Successor and Predecessor presented in accordance with GAAP. For all other metrics, to the extent that the change in basis had a material impact on our results, we have disclosed such impact below.

The financial information, accounting policies and activities of the Successor and Predecessor are referred to those of the Company. The Successor adopted the Predecessor’s accounting policies. See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

Year in Review

Since late 2017, we have been focused on implementing our high-growth, low-cost strategy by transforming our business model to provide a high quality travel experience at affordable fares. In the last two years, we invested significantly in mid-life Boeing 737-800 aircraft, new aircraft interiors and seat densification, and other growth-oriented and cost-saving initiatives. Additionally, we have meaningfully expanded our ancillary product offerings, which allows us to stimulate passenger demand for our product through low base fares and enables passengers to identify, select and pay for the products and services they want to use, which is further complemented by the overhaul of our reservation and distribution system and new website in 2019. We believe a

 

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key component of our success is establishing Sun Country as a high growth, low-cost carrier in the United States by attracting customers with low fares and garnering repeat business by delivering a high quality passenger experience, offering state-of-the-art seat equipment, free streaming in-flight entertainment to passenger devices, seat recline and seat-back power in all of our aircraft, none of which are offered by ULCCs. Furthermore, we redesigned our loyalty program in the fourth quarter of 2018 to be simple and family friendly, and improved the flexibility of our cancellation policy.

During 2019, we reconfigured the seat density of substantially all our aircraft to 183 seats, and subsequently further increased the seat density of our fleet to 186 seats. At 186 seats, we offer two different seat categories: Best and Standard. Best includes preferred boarding, one complimentary alcoholic beverage, four inches of extra legroom and 150% extra recline.

Our revenue has grown from $560 million in 2017 to $         million in 2019 primarily as a result of our increased capacity following the expansion of our network. Our ASMs increased from 5.3 billion in 2017 to                 billion in 2019, driven primarily by an increase in average seat density of our aircraft and an increase in the number of flights and block hours. Our scheduled service revenue has grown from $372 million in 2017 to $         million in 2019. We have focused on the expansion of our network on point-to-point travel outside of MSP to leverage seasonal demand where other airlines are unable to respond effectively to the needs of the market. Since implementing our non-MSP route strategy in early 2018, we grew this service to 10% of scheduled service block hours in 2018 and further increased non-MSP service to     % of scheduled service block hours in 2019. Additionally, we meaningfully expanded our ancillary product offering in the last two years by introducing carry-on and checked bag fees and increasing our buy-on-board options. These efforts led to an increase in ancillary revenue from $33 million in 2017 to $         million in 2019. Ancillary revenue per passenger increased from $13.34 to $                 from 2017 to 2019. Our charter service revenue has grown from $132 million in 2017 to $        million in 2019 primarily due to an increase in the number of charter flights for our casino and sports customers and the U.S. Department of Defense. Other revenue declined from $22 million in 2017 to $         million in 2019 primarily due to lower net revenues from our Sun Country Vacations products along with lower cargo and mail revenues.

Our cost savings initiatives have contributed to reductions in operating costs reflected in a decrease in CASM excluding fuel from 7.79 cents in 2017 to     cents in 2019. Accordingly, we are able to offer highly competitive low-cost fares to our customers and have reduced our average fare per scheduled service passenger from $148.60 in 2017 to $         in 2019. The primary drivers of our cost savings were our outsourcing of Minneapolis station handling, reworking of spare parts agreements, fuel savings initiatives, catering cost reductions and renegotiation of distribution contracts. Our cost structure has resulted in our unique ability to maintain low costs at lower utilizations, which enables us to tailor schedules to peak periods of demand. These efforts have resulted in our operating margin improving from 5.3% in 2017 to     % in 2019.

We transformed our front- and back-end technology, which laid the foundation for future growth and improved merchandising. In June 2019, we introduced our new website which makes booking and travel easier and more enjoyable for our customers. Driving ticket sales through our own website increases our profitability as our website is our lowest cost distribution center, and our redesigned website led to an increased conversion rate and increased bookings on mobile devices. We also completed the implementation of a robust and scalable reservation and distribution system to improve our ability to issue, track and accept electronic tickets, conduct check-in, board and manage our passengers and access to GDSs, which we expect to expand our services to potential passengers.

Fleet Plan

During 2019 we completed the transition of our fleet to substantially all mid-life Boeing 737-800s, a Boeing 737-NG variant, and as of December 31, 2019 we operated a fleet of      aircraft. The use of a single aircraft variant allows for additional cost efficiencies as a result of simplified scheduling, maintenance, flight operations and training.

 

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The transition to 737-800s also resulted in an increase in seat density on substantially all of our aircraft to 183 seats in 2019, which will provide for greater fuel efficiency per ASM. We further increased the seat density of our fleet to 186 seats as a result of additional seat reconfiguration.

We currently have plans to grow our 2020 operating capacity as we take delivery of additional aircraft and make changes to our network. We have agreements in place to add four aircraft in 2020, with an offset of reducing our seasonal fleet by two aircraft, and we have identified commercial opportunities to add between three and five additional aircraft to our fleet in 2021. We then plan to grow the fleet to 50 aircraft by the end of 2023. We expect to finance all of our additional aircraft through debt or finance leases, though we also may enter into new operating leases on an opportunistic basis. Additionally, we intend to buy out certain of our existing aircraft currently financed under operating lease agreements over the next several years using enhanced equipment trust certificates, or EETC, issued through pass-through trusts, which are structured to provide for certain credit enhancements that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of our aircraft financing. We expect to further expand our fleet through our agreement to provide air cargo services to Amazon. We plan to take delivery of an additional 10 Boeing 737-800 aircraft provided by Amazon between the second and third quarters of 2020.

Our strategy is to target mid-life aircraft due to the lower ownership costs relative to new aircraft and the flexibility associated with a liquid market for mid-life aircraft allowing us to adjust the composition of our fleet with limited forward commitments. The average age of the passenger aircraft in our fleet as of December 31, 2018 was approximately 15 years, and we do not expect this to change in the near future. We view aircraft ownership as preferable to leasing due to the increased level of control to optimize and utilize maintenance value, competitive financing costs at investment grade rates, and flexibility to sell or retire aircraft at any time.

Our fleet management strategy also includes making use of short-term leases to support increased seasonal demand. For example, our 737-800 seasonal lease agreement allows us to increase our capacity during our busier winter months in an affordable and flexible manner due to the counter cyclical nature of our networks.

Trends and Uncertainties Affecting Our Business

We believe our operating performance is driven by various factors that typically affect airlines and their markets, including trends which affect the broader travel industry, as well as trends which affect the specific markets and customer base that we target. The following key factors may affect our future performance:

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are the fare, flight schedules, number of routes served from a city, frequent flyer programs, product and passenger amenities, customer service, fleet type and reputation. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. Airlines typically use discounted fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to increase PRASM.

The availability of low-priced fares coupled with an increase in domestic capacity has led to dramatic changes in pricing behavior in many U.S. markets. Legacy network carriers have also begun matching LCC and ULCC pricing on portions of their marginal unsold capacity, which we expect to continue for the foreseeable future. Many domestic carriers have also begun matching lower cost airline pricing, either with limited or unlimited inventory. Moreover, many other airlines have unbundled their services, at least in part, by charging separately for services such as baggage and advance seat selection, which previously were offered as a component of their base fares. This unbundling and other cost-reducing measures could enable competitor airlines to reduce fares on routes that we serve, which could materially adversely affect our business. Refer to “Risk Factors” included elsewhere in this prospectus for additional information.

 

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Aircraft Fuel. Fuel expense represents our single largest operating expense. Jet fuel prices and availability are subject to market fluctuations, refining capacity, periods of market surplus and shortage and demand for heating oil, gasoline and other petroleum products, as well as meteorological, economic and political factors and events occurring throughout the world, which we can neither control nor accurately predict. The future cost and availability of jet fuel cannot be predicted with any degree of certainty. For the year ended December 31, 2018, approximately 48% of our fuel was purchased from two vendors. This concentration is largely driven by our substantial operations in MSP.

To hedge the economic risk associated with volatile aircraft fuel prices, we periodically enter into fuel collars, which allow us to reduce the overall cost of hedging, but may prevent us from participating in the benefit of downward price movements. In the past, we have also entered into fuel option and swap contracts. As of December 31, 2019, we had hedges in place for approximately             % of our projected fuel requirements for scheduled service operations in 2020, with all of our then existing options expected to be exercised or expire by the end of 2021. Generally, our charter operations have pass-through provisions for fuel costs, and therefore we do not hedge our fuel requirements for that component of our business.

Our fuel hedging strategy is dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements, the pricing of hedges and other derivative products in the market and our overall appetite for risk. We believe our strategy economically hedges against unexpected price volatility. However, we cannot be assured that our hedging strategy will be effective or that we will continue our strategy in the future.

We do not apply hedge accounting on our fuel derivative contracts, and as a result, changes in the fair value of our fuel derivative contracts are recorded within the period as a component of aircraft fuel expense. See Note 9 to our audited consolidated financial statements included elsewhere in this prospectus for further discussion of our hedging activity.

Seasonality and Volatility. The airline industry is affected by economic cycles and trends, where unfavorable economic conditions have historically reduced airline travel spending. For most VFR travel, and cost-conscious leisure travelers, travel is a discretionary expense, and although we believe low-cost airlines are best suited to attract travelers during periods of unfavorable economic conditions as a result of such carriers’ low base fares, travelers have often elected to replace air travel at such times with car travel or other forms of ground transportation or have opted not to travel at all.

Our operations are highly seasonal as we manage our route network and aircraft fleet to match demand. As a result, our results of operations for any interim period are not necessarily indicative of those for the entire year. We generally expect demand to be greater in the winter season due to our customers’ propensity to travel to warm leisure destinations from MSP, and in the summer season due to increased demand for VFR and leisure travel. We continually work to meet the need of both VFR and leisure travelers. Accordingly, our network of destinations includes those popular year-round, as well as those that are highly seasonal, and we adapt our flight schedule according to expected patterns of demand throughout the year. Understanding the purpose of our customers’ travel and our ability to adjust capacity accordingly helps us optimize destinations, strengthen our network and increase unit revenues. We will look to incorporate new destinations with seasonality that complements our current mix of customers and destinations to mitigate the overall impact of seasonality on our business. Part of our network strategy includes expanding our presence outside of MSP to leverage seasonal demands peaks where other airlines are unable to effectively respond to the needs of the market. For example, we expect to continue to target cold-to-warm leisure markets in the upper Midwest, where we believe we have a competitive advantage due to our cold weather operational expertise and strong brand recognition, as well as other large, fragmented markets. We also continue to use seasonal aircraft leases to accommodate increased demand during peak seasons. Furthermore, our charter operations complement our network strategy by maintaining aircraft and crew utilization in periods when scheduled service would be less profitable.

 

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Labor. The airline industry is heavily unionized and our business is labor intensive. The wages, benefits and work rules of unionized airline industry employees are determined by CBAs. Relations between air carriers and labor unions in the United States are governed by the RLA. Under the RLA, CBAs generally contain “amendable dates” rather than expiration dates and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the NMB. This process continues until either the parties have reached agreement on a new CBA or the parties have been released to “self-help” by the NMB. In most circumstances the RLA prohibits strikes, however, after the release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

As of December 31, 2018, 53% of our employees were represented by three union groups. The union groups include our pilots, represented by the Air Line Pilots Association, our flight attendants, represented by the International Brotherhood of Teamsters, and our dispatchers, represented by the Transport Workers Union. Our collective bargaining agreement with our dispatchers became amendable on September 27, 2017 and we entered into NMB mediation with the union representing this group on September 19, 2018. On December 3, 2019 our dispatchers approved a new contract, now amendable on November 14, 2024. Our collective bargaining agreement with our flight attendants is currently amendable and we are in negotiations with the union representing this group. Our collective bargaining agreement with our pilots is amendable on October 31, 2020. If we are unable to reach an agreement with the respective unions in current or future negotiations regarding the terms of their CBAs, we may be subject to operational slowdowns or stoppages, which is likely to adversely affect our ability to conduct business. Any agreement we do reach could increase our labor and related expenses.

Aircraft Maintenance. The amount of total maintenance costs and related depreciation of significant maintenance expense is subject to variables such as estimated utilization rates, average stage length, the interval between significant maintenance events, the size, age and makeup of our fleet, maintenance holidays, government regulations and the level of unscheduled maintenance events and their actual costs.

Maintenance expense grew through 2019 and 2018 mainly as a result of a growing fleet, a trend that we expect to continue for the next several years as we take delivery of additional aircraft.

As of December 31, 2018, the average age of our passenger aircraft was approximately 15 years.

The terms of our aircraft lease agreements generally provide that we pay maintenance reserves, also known as supplemental rent, monthly to our lessors to be held as collateral in advance of significant maintenance activities required to be performed by us, resulting in our recording significant lessor maintenance deposits on our consolidated balance sheet. Some portions of the maintenance reserve payments are fixed contractual amounts, while others are based on a utilization measure, such as actual flight hours or cycles, and vary by agreement. As a result, for leases requiring maintenance reserves, the cash costs of scheduled significant maintenance events are paid in advance of the recognition of the maintenance event in our results of operations. For more information, refer to “Critical Accounting Policies and Estimates—Aircraft Maintenance.”

Components of Operations

Operating Revenues

Scheduled service. Scheduled service revenue consists of base fares, unused and expired passenger credits and other expired travel credits.

Ancillary. Ancillary revenue consists of revenue generated from air travel-related services such as baggage fees, seat selection and upgrade fees, itinerary service fees, on-board sales and sales of trip insurance.

Charter service. Charter service revenue consists of revenue earned from our charter operations, primarily generated through our service to the U.S. Department of Defense, collegiate and professional sports teams and casinos.

 

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Other. Other revenue consists primarily of revenue from services in connection with our Sun Country Vacations products, including organizing ground services, such as hotel, car and transfers. Other revenue also includes services not directly related to providing passenger services such as the advertising, marketing and brand elements resulting from our co-branded credit card program. This component of our revenues also includes revenue from mail and cargo operations through the use of cargo space on regularly scheduled passenger aircraft.

Operating Expenses

Aircraft Fuel. Aircraft fuel expense is our single largest operating expense. It includes jet fuel, federal and state taxes, other fees and the mark-to-market gains and losses associated with our fuel derivative contracts as we do not apply hedge accounting. Aircraft fuel expense can be volatile, even between quarters, due to price changes and mark-to-market gains and losses in the value of the underlying derivative instruments as crude oil prices and refining margins increase or decrease.

Salaries, Wages, and Benefits. Salaries, wages, and benefits expense includes salaries, hourly wages, bonuses, equity-based compensation and profit sharing paid to employees for their services, as well as related expenses associated with medical benefits, employee benefit plans, employer payroll taxes and other employee related costs.

Aircraft Rent. Aircraft rent expense consists of monthly lease charges for aircraft and spare engines under the terms of the related operating leases and is recognized on a straight-line basis. Aircraft rent expense also includes supplemental rent, which consists of maintenance reserves paid to aircraft lessors in advance of the performance of significant maintenance activities that are not probable of being reimbursed to us by the lessor during the lease term, as well as lease return costs, which consist of all costs that would be incurred at the return of the aircraft, including costs incurred to return the airframe and engines to the condition required by the lease. Aircraft rent expense is partially offset by the amortization of over-market liabilities related to unfavorable terms of our operating leases and maintenance reserves which existed as of the date of our acquisition by the Apollo Funds, which were established as part of the acquisition. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for further information on the over-market liabilities.

Maintenance. Maintenance expense includes the cost of all parts, materials and fees for repairs performed by us and our third-party vendors to maintain our fleet. It excludes direct labor cost related to our own mechanics, which are included in salaries, wages and benefits expense. It also excludes maintenance expenses, which are deferred based on the built-in overhaul method for owned aircraft and subsequently amortized as a component of depreciation and amortization expense. Our maintenance expense is reduced due to recognizing a liability (or contra-asset) that offsets expenses for maintenance events incurred by the Successor but paid for by the Predecessor, established as part of our acquisition by the Apollo Funds for aircraft in our fleet as of the date of the acquisition. For more information on these accounting methods, refer to “—Critical Accounting Policies and Estimates—Aircraft Maintenance.”

Sales and Marketing. Sales and marketing expense includes credit card processing fees, travel agent commissions and related global distribution systems fees, advertising, sponsorship and distribution costs, such as the costs of our call centers, and costs associated with our frequent flier program. It excludes related salary and wages of personnel, which are included in salaries benefits and wages expense.

Depreciation and Amortization. Depreciation and amortization expense includes depreciation of fixed assets we own and leasehold improvements, as well as the amortization of capitalized software costs and finite-lived intangible assets. It also includes the amortization of significant maintenance expenses we deferred under the built-in overhaul method for owned aircraft.

Ground Handling. Ground handling includes ground activities including baggage handling, ticket counter and other ground services.

 

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Landing Fees and Airport Rent. Landing fees and airport rent includes aircraft landing fees and charges for the use of airport facilities.

Special Items, net. Special items, net includes the impact of changes to the terms of our rewards program recognized in 2018. The program changes included a net reduction in expenses of $8.5 million due to the earlier expiration of outstanding points, partially offset by an increase in expense as a result of improved terms for members’ redemption of points. We also recognized $2.0 million of expense during the Combined 2018 period related to early-out and employee separation expenses incurred in connection with outsourcing certain operations and other employee initiatives. These efforts were primarily related to airport station, flight attendants and ground handling employees.

Other Operating. Other operating expenses include crew and other employee travel, interrupted trip expenses, information technology, property taxes and insurance, including hull-liability insurance, supplies, legal and other professional fees, facilities and all other administrative and operational overhead expenses.

Non-operating Income (Expense)

Interest Income. Interest income includes interest on our cash and equivalent and investment balances.

Interest Income. Interest income includes interest on our cash and equivalent and investment balances. Interest income is generally immaterial to our results of operations, reflecting the current low interest rate environment and our unrestricted cash balances.

Other, net. Other expenses include activities not classified in any other area of the consolidated statements of operations, such as gain or loss on sale or retirement of assets and certain consulting expenses.

Income Taxes

During the Predecessor period, we were taxed as a limited liability company as our prior owners had elected to be treated as a partnership under the Internal Revenue Code of 1986, as amended (the “Code”), whereby our income or loss was reported by our SCA common stockholders on their individual tax returns. Therefore, no provision for income tax expense was included on the consolidated statements of operations during the Predecessor 2018 period.

At the acquisition date, we elected to be treated as a corporation for income tax purposes. Therefore, within the Successor periods we account for income taxes using the asset and liability method. We record a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We record deferred taxes based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In assessing our ability to utilize our deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will be realized. We consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis.

 

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Results of Operations

Our combined results for the year ended December 31, 2018 represent the mathematical addition of the Successor 2018 period and Predecessor 2018 period. This combination does not comply with GAAP, but is presented because we believe it provides the most meaningful comparison of our results. See “ —Non-GAAP Financial Measures.” We have disclosed the impact of the acquisition accounting of each financial statement line item as applicable in the results of operations discussion below.

 

     As reported              
     Successor           Predecessor     Combined        
     For the year
ended
December
31, 2019
     For the
period April
11, 2018
through
December
31, 2018
          For the
period
January 1,
2018
through
April 10,
2018
    For the year
ended
December 31,
2018
    Year over Year Change  
(in thousands)                                             

Operating revenues:

                   

Scheduled service

   $                    $ 224,507          $ 132,233     $ 356,740     $                                          

Ancillary

        41,065            15,671       56,736                  

Charter service

        111,317            40,663       151,980                  

Other

        8,042            8,885       16,927                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Total operating revenues

   $        $ 384,931          $ 197,452     $ 582,383     $                  
  

 

 

    

 

 

      

 

 

   

 

 

   

 

 

    

 

 

 
 

Operating expenses:

                   

Aircraft fuel

   $        $ 119,553          $ 45,790     $ 165,343                  

Salaries, wages, and benefits

        90,263            36,964       127,227                  

Aircraft rent(1)

        36,831            28,329       65,160                  

Maintenance(2)

        15,491            9,508       24,999                  

Sales and marketing

        17,180            10,854       28,034                  

Depreciation and amortization(3)

        14,405            2,526       16,931                  

Ground handling

        23,828            8,619       32,447                  

Landing fees and airport rent

        25,977            10,481       36,458                  

Special items, net

        (6,706          271       (6,435                

Other operating

        40,877            17,994       58,871                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

        377,699            171,336       549,035                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

   $        $ 7,232          $ 26,116     $ 33,348     $                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Non-operating income (expense):

                   

Interest income

   $                $ 258          $ 96     $ 354     $                  

Interest expense

        (6,060          (339     (6,399                

Other, net

        (1,636          37       (1,599                
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Total non-operating expense

        (7,438          (206     (7,644                        
 

Income before income tax

        (206          25,910       25,704                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Income tax expense

        161            —         161                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $                   $ (367        $ 25,910     $ 25,543     $                                  
  

 

 

    

 

 

        

 

 

   

 

 

   

 

 

    

 

 

 

 

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     As reported                
     Successor           Predecessor      Combined         
     For the year
ended
December
31, 2019
     For the
period April
11, 2018
through
December
31, 2018
          For the
period
January 1,
2018
through
April 10,
2018
     For the year
ended
December 31,
2018
     Year over Year Change  
(in thousands)                                               

Other Financial Data

                     

Adjusted Net Income(4)

                        $ (5,871        $ 26,181      $ 20,310                                                
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDAR(4)

        49,688            57,279        106,967                   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Aircraft Rent expense for the Successor period is reduced due to amortization of a liability representing lease rates and maintenance reserves which were higher than market terms of similar leases at the time of our acquisition by the Apollo Funds. This liability was recognized at the time of the acquisition and is being amortized into earnings through a reduction of Aircraft Rent on a straight-line basis over the remaining life of each lease. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(2)

Maintenance expense for the Successor period is reduced due to recognizing a liability (or contra-asset) to represent the Successor’s obligation to perform planned maintenance events paid for by the Predecessor on leased aircraft at the date of our acquisition by the Apollo Funds. The liability (or contra-asset) is recognized as a reduction to Maintenance expense as reimbursable maintenance events are performed and maintenance expense is incurred. See Note 2 and Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(3)

Depreciation and amortization expense increased in the Successor period due to higher fair values for certain acquired assets and to the amortization of definite-lived intangible assets. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

(4)

See “ —Non-GAAP Financial Measures” for definitions of these measures and reconciliations to the most comparable GAAP metric.

Key Operating Statistics and Metrics

The following table presents our relevant operating metrics for the years ended December 31, 2017, 2018 and 2019. For the year ended December 31, 2018, there was no impact to these metrics following the acquisition as we continued with the same core operations. Therefore, we believe the combined Predecessor 2018 period and Successor 2018 period presentation provides the most meaningful comparison of our results.

 

    2017     2018     2019  
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
 

Departures

    20,488       7,981       28,469       19,940       8,254       28,194        

Block hours

    68,357       16,941       85,298       68,548       17,335       85,883        

Aircraft miles

    27,823,467       6,358,418       34,181,885       27,725,797       6,369,866       34,095,663        

ASMs (in thousands)

    4,270,718       979,756       5,250,474       4,455,838       1,007,391       5,463,229        

TRASM (in cents) (1)

    *       *       10.65       *       *       10.66        

Average aircraft available for service(1)

    *       *       23.4       *       *       24.3        

Aircraft at end of period(1)

    *       *       26       *       *       30        

Average daily aircraft utilization (in hours) (1)

    *       *       9.9       *       *       9.7        

Passengers(2)

    2,502,082       *       *       2,614,929       *       *        

RPMs (in thousands) (2)

    3,419,527       *       *       3,653,007       *       *        

PRASM (in cents) (2)

    8.71       *       *       8.01       *       *        

Load factor(2)

    80.1     *       *       82.4     *       *        

Average fare(2)

  $ 148.60       *       *     $ 136.42       *       *        

Ancillary revenue per passenger(2)

  $ 13.34       *       *     $ 21.70       *       *        

 

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    2017     2018     2019  
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
    Scheduled
Service
    Charter
Service
    Total
System
 

Charter revenue per block hour

    *     $ 7,818       *       *     $ 8,767       *        

Fuel gallons consumed (in thousands)

    52,104       12,551       64,656       52,303       12,678       64,981        

Fuel cost per gallon, excl. derivatives

    *       *     $ 1.85       *       *     $ 2.34        

CASM (in cents)(3)

    *       *       10.09       *       *       10.05        

CASM excluding fuel (in cents) (3)

    *       *       7.79       *       *       6.94        

Adjusted CASM (in cents) (3)

    *       *       7.79       *       *       7.05        

Employees at end of period

    *       *       1,889       *       *       1,549        

 

See “Glossary of Terms” for definitions of terms used in this table.

*

Certain operating statistics and metrics are not presented as they are not calculable or are not utilized by management.

(1)

Scheduled service and charter service utilize the same fleet of aircraft. Aircraft counts and utilization metrics are shown on a system basis only.

(2)

Passenger-related statistics and metrics are shown only for scheduled service. Charter service revenue is driven by flight statistics.

(3)

See “ —CASM” for definitions of these measures and more information.

CASM

CASM is a key airline cost metric. CASM is defined as operating expenses divided by total available seat miles.

CASM excluding fuel is one of the most important measures used by management and by our board of directors in assessing quarterly and annual cost performance. CASM excluding fuel is also a measure commonly used by industry analysts and we believe it is an important metric by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors. 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. We also exclude certain commissions and other costs of selling our vacations product from this measure as these costs are unrelated to our airline operations and may improve comparability to our peers. 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 exclude special items and other adjustments as defined in the relevant reporting period that are unusual and not representative of our ongoing costs in our calculation of Adjusted CASM. Adjusted CASM is one of the most important measures used by management and by our board of directors in assessing quarterly and annual cost performance.

The following table presents the reconciliation of CASM to Adjusted CASM.

 

     For the year ended December 31,  
     2019      2018  
     (in thousands)      Per ASM
(in cents)
     (in thousands)      Per ASM
(in cents)
 

CASM

           549,035        10.05  

Aircraft fuel

           165,343        3.03  

Sun Country Vacations

                                     4,541        0.08  
  

 

 

    

 

 

    

 

 

    

 

 

 

CASM excluding fuel

           379,151        6.94  

Special items, net

           (6,435      (0.12

Stock compensation expense

                                     373        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted CASM

           385,213        7.05  

 

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Comparison of Successor 2019 period to Combined 2018 period

Operating Revenues

 

     Successor      Combined         
(in thousands)    For the year ended
December 31, 2019
     For the year ended
December 31, 2018
     Change  

Operating Revenues

           

Scheduled service

   $        $ 356,740      $                  

Ancillary

        56,736                   

Charter service

        151,980                   

Other

        16,927                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Revenues

   $                $ 582,383      $                          
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating revenues increased $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period. The increase was due to a $             million, or     %, increase in scheduled service revenue, a $             million, or    %, increase in ancillary revenue and a $             million, or     %, increase in charter service revenue, partially offset by a $             million, or     %, decrease in other revenue. TRASM increased         cents, or     %, for the Successor 2019 period compared to the Combined 2018 period.

The increase in scheduled service revenue was primarily related to increases in our capacity and departures along with an increase in load factor. Our capacity, as measured by ASMs, increased by     % for the Successor 2019 period as compared to the Combined 2018 period as a result of additional aircraft in service and increases in the number of seats on board. We undertook the reconfiguration of our fleet to a high-density seating configuration, substantially completed in 2019, which led to an increase in our number of Scheduled Service passengers to million in the Successor 2019 period from 2.6 million in the Combined 2018 period. The increase in scheduled service revenue was partially offset by a     % decrease in average scheduled passenger fare from $136.42 in the Combined 2018 period to $             in the Successor 2019 period, driven by our low-cost pricing strategy. PRASM decreased by         cents, or    %, largely due to the lower passenger fare, partially offset by an increase in load factor, which increased from 82.4% in the Combined 2018 period to     % in the Successor 2019 period.

The increase in ancillary revenue was driven by the unbundling of our services to improve our product segmentation in January 2018, which previously were offered as a component of the base fares. Our focus on ancillary services has driven higher ancillary revenue on a per passenger basis of $            for the Successor 2019 period as compared to $21.70 for the Combined 2018 period.

The increase in our charter service revenue was primarily due to an increase in the number of charter flights for our casino and sports customers and the U.S. Department of Defense.

The decrease in our other revenue was primarily due to lower net revenues from our Sun Country Vacations products.

 

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Operating Expenses

 

     Successor      Combined         
(in thousands)    For the year ended
December 31, 2019
     For the year ended
December 31, 2018
     Change  

Operating expenses:

           

Aircraft fuel

   $        $ 165,343      $                          

Salaries, wages and benefits

        127,227                   

Aircraft rent

        65,160                   

Maintenance

        24,999                   

Sales and marketing

        28,034                   

Depreciation and amortization

        16,931                   

Ground handling

        32,447                   

Landing fees and airport rent

        36,458                   

Special items, net

        (6,435                 

Other operating

        58,871                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating expenses

   $                $ 549,035      $                  
  

 

 

    

 

 

    

 

 

    

 

 

 

Aircraft Fuel. Aircraft fuel expense was similar for the Successor 2019 period compared to the Combined 2018 period. Our fuel gallons consumed increased by     % due to our increased level of operations. The average price per gallon of fuel declined by     %, partially offsetting the increased usage. Aircraft fuel expense also includes unrealized mark-to-market gains or losses from fuel derivative contracts associated with our economic fuel hedges. This impact was a gain of $             million in the Successor 2019 period, compared with a loss of $12 million in the Combined 2018 period.

Salaries, Wages and Benefits. Salaries, wages and benefits expense increased by $              million, or      %, for the Successor 2019 period compared to the Combined 2018 period, primarily due to higher costs for our pilots and flight attendants due to contractual rate increases and expanded operations, and higher general and administration staffing along with the full year impact of the management bonus and stock compensation plans introduced during 2018. The increase was partially offset by lower headcount as a result of outsourcing certain ground operations.

Aircraft Rent. Aircraft rent expense decreased by $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period. Aircraft rent expense decreased primarily due to a change in the composition of our aircraft fleet between leased aircraft (for which rent expense is recorded under aircraft rent) and purchased aircraft (for which depreciation expense is recorded under depreciation and amortization). The decrease was primarily a result of purchasing aircraft previously on an operating lease, and returning              leased 737-700 aircraft during the Successor 2019 period. In connection with accounting for our acquisition by the Apollo Funds, we recognized a liability representing lease rates and maintenance reserves which are unfavorable compared with market terms of similar leases. This liability is being amortized into earnings through a reduction of aircraft rent on a straight-line basis over the remaining life of each lease.

Maintenance. Maintenance materials and repair costs increased by $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period. This increase was primarily due to the timing and number of maintenance events, including two additional engine overhauls and four additional heavy checks in the Successor 2019 period compared to the Combined 2018 period. Maintenance materials expense also increased due to additional events, partially offset by reduced expenses under our outsourced parts supply agreement.

Sales and Marketing. Sales and marketing expense increased by $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period, primarily due to higher sales that directly drives higher

 

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credit card fees, partially offset by a decrease in booking fees as a result of a higher proportion of bookings on our redesigned website, as our website is our lowest cost distribution channel, and more favorable renegotiated contracts with third-party distribution channels.

Depreciation and Amortization. Depreciation and amortization expense increased by $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period. This increase was primarily due to the impact of a change in the composition of the fleet from all leased to an increased number of owned aircraft, and the impact of acquisition accounting and the resulting increase to the book value of our assets. Depreciation and amortization includes $             million and $2.3 million of amortization in the Successor 2019 period and Successor 2018 period, respectively, related to definite lived intangible assets recorded as a result of purchase price accounting for our acquisition by the Apollo Funds. There was no comparable amortization in the Predecessor 2018 period.

Ground Handling. Ground handling expense includes ground activities including baggage, ticket counter and other ground services. The     % increase in 2019 compared to 2018 was due to the increase in departures and additional airports in our route network for both our scheduled service and charter operations. We fully outsourced MSP ground handling services in May 2018, contributing to a reduction in salaries, wages and benefits but resulting in higher ground handling expenses.

Landing Fees and Airport Rent. Landing fees and airport rent includes aircraft landing fees and charges for the use of airport facilities. The      % increase in 2019 compared to 2018 was due to the increase in departures and additional airports in our route network.

Special Items, net. Special items, net includes the impact of changes to the terms of our rewards program recognized in 2018. The program changes included a net reduction in expenses of $8.5 million due to the earlier expiration of outstanding points, partially offset by an increase in expense as a result of improved terms for members’ redemption of points. We also recognized $2.0 million of expense during the Combined 2018 period related to early-out and employee separation expenses incurred in connection with outsourcing certain operations and other employee initiatives. These efforts were primarily related to airport station, flight attendants and ground handling employees.

Other Operating Expenses. Other operating expenses increased by $             million, or     %, for the Successor 2019 period compared to the Combined 2018 period, primarily due to our higher level operations.

Non-operating Income (Expense)

 

     Successor      Combined         
(in thousands)    For the year ended
December 31, 2019
     For the year ended
December 31, 2018
     Change  

Non-operating Income (Expense):

        

Interest income

   $                $ 354                

Interest expense

        (6,399              

Other, net

        (1,599              
  

 

 

    

 

 

    

 

 

 

Total Non-operating Expenses

   $        $ (7,644              
  

 

 

    

 

 

    

 

 

 

Interest Income. Interest income increased but was immaterial for both the Successor 2019 period and increased by $             million, or     %, compared to the Combined 2018 period.

Interest Expense. Interest expense increased by $             million, or     %, in the Successor 2019 period compared to the Combined 2018 period, primarily due to finance leases and to debt issued for the acquisition of new aircraft and spare engines, in part due to the new debt incurred in connection with the 2019-01 EETC.

 

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Other, net. Other, net decreased by $             million, or     %, in the Successor 2019 period compared to the Combined 2018 period, primarily due to miscellaneous income in 2019.

Income Taxes

In the Successor 2019 period, our effective tax rate was     %. Our tax rate can vary depending on the amount of income we earn in each state and the state tax rate applicable to such income. We were taxed as a limited liability company during the 2018 Predecessor period, and therefore, no provision for income tax expense was included on the consolidated statements of operations for that period.

Non-GAAP Financial Measures

We sometimes use information that is derived from the 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 prospectus to the most directly comparable GAAP financial measures.

Presentation of Combined 2018 Period

We have presented our results of operations and liquidity and capital resources for the Combined 2018 period, a non-GAAP measure that combines the Predecessor 2018 period with the Successor 2018 period. This combination does not comply with GAAP, but is presented because our core operations continued throughout 2018 and we believe it provides the most meaningful comparison of our results of operations for our fiscal years. The significant differences in accounting for the Successor period as compared to the Predecessor period, which were established as part of our acquisition by the Apollo Funds, are in (1) aircraft rent, due to the over-market liabilities related to unfavorable terms of our existing aircraft leases and maintenance reserve payments, which will be amortized on a straight-line basis as a reduction of aircraft rent over the remaining life of each lease, (2) maintenance expenses, due to recognizing a liability (or contra-asset) that will offset expenses for maintenance events incurred by the Successor but paid for by the predecessor and (3) depreciation and amortization, due to the recognition of our property and equipment and other intangible assets at fair value at the time of the acquisition, which will be amortized through depreciation and amortization on a straight-line basis over their respective useful lives. Please see our audited consolidated financial statements and the related notes included elsewhere in this prospectus. This combined data is presented for supplemental purposes only and (1) may not reflect the actual results we would have achieved absent the acquisition, (2) may not be predictive of future results of operations and (3) should not be viewed as a substitute for the financial results of the Predecessor and Successor presented in accordance with GAAP.

Adjusted Net Income and Adjusted EBITDAR

Adjusted Net Income and Adjusted EBITDAR are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of net income and EBITDAR 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.

 

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Adjusted Net Income and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: Adjusted Net Income and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; Adjusted EBITDAR does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; Adjusted EBITDAR does not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDAR does not reflect any cash requirements for such replacements; and other companies in our industry may calculate Adjusted Net Income and Adjusted EBITDAR differently than we do, limiting each measure’s usefulness as a comparative measure. Because of these limitations, Adjusted Net Income and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Further, we believe Adjusted EBITDAR is useful in evaluating our operating performance compared to our competitors because its calculation isolates the effects of financing in general, the accounting effects of capital spending and acquisitions (primarily aircraft, which may be acquired directly, directly subject to acquisition debt, by finance lease or by operating lease, each of which is presented differently for accounting purposes), and income taxes, which may vary significantly between periods and for different companies for reasons unrelated to overall operating performance. However, because derivations of Adjusted Net Income and Adjusted EBITDAR 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 net income, including Adjusted Net Income and Adjusted EBITDAR, as presented may not be directly comparable to similarly titled measures presented by other companies. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance since it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted Net Income and Adjusted EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

The following table presents the reconciliation of Net Income to Adjusted Net Income for the periods presented below.

 

     Successor      Successor           Predecessor      Combined
2018
 
     For the year
ended
December 31,
2019
     For the period
April 11, 2018
through
December 31,
2018
          For the period
January 1, 2018
through
April 10, 2018
     For the year
ended
December 31,
2018
 
(in thousands)                                 

Adjusted Net Income reconciliation:

               

Net income

   $        $ (367        $ 25,910      $ 25,543  

Special items, net(1)

        (6,706          271        (6,435

Gain on asset transactions, net

        (811          —          (811

Stock compensation expense

        373            —          373  

Income tax effect of adjusting items, net(2)

        1,640            —          1,640  
  

 

 

    

 

 

        

 

 

    

 

 

 

Adjusted Net Income

   $                $ (5,871        $ 26,181      $ 20,310  
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(1)

See Note 14 to our audited consolidated financial statements included elsewhere in this prospectus for additional information on the components of special items, net.

(2)

The tax effect of adjusting items, net are calculated at the Company’s statutory rate for the applicable period.

 

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The following table presents the reconciliation of Net Income to Adjusted EBITDAR for the periods presented below.

 

     Successor      Successor             Predecessor      Combined
2018
 
     For the year
ended
December 31,
2019
     For the period
April 11, 2018
through
December 31,
2018
            For the period
January 1,
2018 through

April 10, 2018
     For the year
ended

December 31,
2018
 

Adjusted EBITDAR
reconciliation:

                

Net income

   $                $ (367         $ 25,910      $ 25,543  

Special items, net

        (6,706           271        (6,435

Interest expense

        6,060             339        6,399  

Gain on asset transactions, net

        (811           —          (811

Stock compensation expense

        373             —          373  

Interest income

        (258           (96      (354

Provision for income taxes

        161             —          161  

Depreciation and Amortization

        14,405             2,526        16,931  

Aircraft rent

        36,831             28,329        65,160  
  

 

 

    

 

 

         

 

 

    

 

 

 

Adjusted EBITDAR

   $        $ 49,688           $ 57,279      $ 106,967  
  

 

 

    

 

 

       

 

 

    

 

 

 

Liquidity and Capital Resources

The airline business is capital intensive and our ability to successfully execute our business strategy is largely dependent on the continued availability of capital on attractive terms and our ability to maintain sufficient liquidity. We have historically funded our operations and capital expenditures primarily through cash from operations, proceeds from SCA common stockholders’ capital contributions, the issuance of promissory notes and our 2019-01 EETC financing.

Our primary sources of liquidity as of December 31, 2018 include our existing cash and equivalents of $29.6 million and short-term investments of $5.9 million, our expected cash generated from operations and our $20.0 million ABL Facility with availability of $16.0 million. In addition, we had restricted cash of $13.8 million as of December 31, 2018, which consists of cash received as prepayment for chartered flights that is maintained in separate escrow accounts, from which the restrictions are released once transportation is provided.

On December 13, 2017, Sun Country Inc. (formerly known as MN Airlines, LLC), our wholly-owned subsidiary (the “Borrower”), entered into an Asset-Based Revolving Credit Agreement (the “ABL Credit Agreement”), which provides for an asset-based revolving credit facility (the “ABL Facility”) in an aggregate committed principal amount of up to $20.0 million, subject to borrowing base availability. The borrowing base is equal to the sum of (i) 90.0% of the net amount of eligible credit card accounts, (ii) 85.0% of the net amount of eligible receivables, (iii) 75.0% of the net book value of eligible inventory and (iv) 75.0% of the net book value of eligible equipment. The ABL Facility matures on April 11, 2021.

Borrowings under the ABL Credit Agreement bear interest at a rate equal to, at our option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs or (b) a base rate, as defined in the ABL Credit Agreement, in each case plus an applicable margin of 4.00% per annum for LIBOR loans or 3.00% per annum for base rate loans. In addition, the Borrower is required to pay a commitment fee to the lenders in respect of the

 

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unutilized commitments under the ABL Facility at a rate equal to 0.50% per annum, customary letter of credit fees and customary agency fees. The obligations of the Borrower under the ABL Facility are unconditionally guaranteed by SCA Acquisition, LLC on a limited-recourse basis.

The ABL Facility contains certain customary affirmative and negative covenants and certain customary events of default, including relating to a change of control. The ABL Facility also includes a financial maintenance covenant, which the Borrower was in compliance with as of September 30, 2019.

Our primary uses of liquidity are for operating expenses, capital expenditures, lease rentals and maintenance reserve deposits, debt repayments and working capital requirements. Our single largest capital expenditure requirement relates to the acquisition of aircraft, which we have historically acquired through operating and finance leases and debt.

In December 2019, we arranged for the issuance of Class A, Class B and Class C pass through trust certificates, Series 2019-1, or the “2019-1 EETC,” in an aggregate face amount of $248.6 million (the “Certificates”) for the purpose of financing or refinancing 13 used aircraft. We plan to use the proceeds from the 2019-01 EETC to purchase three aircraft new to our fleet, purchase seven aircraft currently under operating or financing leases with purchase options and refinance three aircraft currently owned and financed under previously existing debt financing. The total appraised value of the 13 aircraft is approximately $292.5 million. The Certificates were issued to certain institutional investors, and the 2019-1 EETC provides that the face amount of the Certificates will be funded by the purchase price paid by such investors for its Certificates on four funding dates from December 2019 to June 2020. On the first funding date in December 2019, $102.7 million of the $248.6 million face amount was funded from payment of the purchase price of the Certificates and placed in escrow. Subsequently in December 2019, we used $28.3 million of such escrowed funds to finance the purchase of one of the 13 aircraft. The Certificates bear interest at the following rates per annum: Class A, 4.13% relating to seven of the financed aircraft and 4.25% relating to six of the financed aircraft; Class B, 4.66% relating to seven of the financed aircraft and 4.78% relating to six of the financed aircraft; and Class C, 6.95%. The expected maturity date of the Class A is December 15, 2027, the Class B is December 15, 2025 and the Class C is December 15, 2023.

Although we do not have any additional aircraft purchase or lease commitments in place, we plan to grow the fleet to 50 aircraft by the end of 2023. 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 further information regarding our future expected capital expenditures, please refer to “—Contractual Obligations and Commitments” below.

In addition to funding the acquisition of aircraft, we are required by 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 consolidated balance sheet. A portion of our cash is therefore unavailable until after we have completed the scheduled maintenance in accordance with the terms of the operating leases. In the Successor 2019 period and the Combined 2018 period, we made $             million and $31.2 million, respectively, in maintenance deposit payments to our lessors. As of December 31, 2018, we had $14.0 million in recoverable aircraft maintenance deposits on our consolidated balance sheet, of which $1.4 million is included in accounts receivable because the eligible maintenance had been performed and reimbursement from the lessor is pending.

We believe that our unrestricted cash and cash equivalents, short-term investments and availability under our ABL Facility and the 2019-01 EETC, 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 12 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, weather-related disruptions, the impact of airline bankruptcies, restructurings or consolidations, U.S. military actions or acts of terrorism.

 

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In our cash and cash equivalents and short-term investments portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.

The table below presents the major indicators of financial condition and liquidity:

 

     Successor         
(in thousands, except debt-to-capital amounts)    As of
December
31, 2019
     As of
December
31, 2018
     Change  

Cash and equivalents

   $                $ 29,600                

Investments

        5,947                

Long-term debt, net of current portion

        49,823                

Stockholders’ equity

        235,647                

Long-term debt-to-capital including aircraft operating and finance lease obligations(1)

        0.6                

 

(1)

Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date. In 2019, following the adoption of the new lease accounting standard, this calculation will be performed utilizing the operating lease right-of-use asset as capitalized on our balance sheet. It is not expected to significantly change the ratio. Finance lease obligations were formerly referred to as capital lease obligations prior to our adoption of the new leasing standard on January 1, 2019. See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

Cash Flows

The following table presents information regarding our cash flows for the Successor 2019 period compared to the Successor 2018 and Predecessor 2018 period and the Combined 2018 period:

 

     Successor           Predecessor     Combined        
(in thousands)    For the
year ended
December
31, 2019
     For the
period April
11, 2018
through
December 31,
2018
          For the
period
January 1,
2018 through
April 10,
2018
    For the year
ended
December
31, 2018
    Change  

Net cash provided by operating activities

   $                $ 13,764          $ 4,583     $ 18,347                               

Net cash used in investing activities

        (80,823          (2,594     (83,417                

Net cash provided by (used in) financing activities

        102,193            (10,680     91,513                  

Cash Provided By Operating Activities. Net cash provided by operating activities was $             million during the Successor 2019 period compared to $18.3 million during the Combined 2018 period. The increase of $ million is primarily due to higher operating income, largely offset by higher interest payments and by a one-time recovery of amounts held by our credit card processor in the Successor 2018 period.

Cash Used In Investing Activities. Cash used in investing activities was $             million during the Successor 2019 period compared to $83.4 million during the Combined 2018 period. Our capital expenditures were $         million in the Successor 2019 period, or $         million lower than the Combined 2018 period, primarily due to the investments in our fleet and other assets during 2018 driven by our transformation plan, including the purchase of three aircraft. Cash used in investing activities related to changes in investments increased by $            million in the Successor 2019 period as compared to net purchases of $2.2 million in the Combined 2018 period due to higher funding of letters of credit and surety bonds associated with our operations at various airports.

 

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Cash Provided By Financing Activities. Cash provided by financing activities was $             million during the Successor 2019 period compared to $91.5 million during the Combined 2018 period. During the Successor 2019 period, we issued equipment notes of $        million in connection with the 2019-01 EETC financing, partially offset by debt payments of $         million and principal payments related to our finance leases of $         million. We generated $63.3 million in proceeds from borrowings in the Combined 2018 period and we made principal repayments of borrowings of $5.9 million and principal payments of capital lease liabilities of $3.2 million. During the Combined 2018 period, we raised $47.9 million in proceeds from SCA common stockholders’ capital contributions in the Successor 2018 period, partially offset by cash distributions of $10.5 million to SCA common stockholders in the Predecessor 2018 period.

Commitments and Contractual Obligations

We have contractual obligations comprised of aircraft leases and supplemental maintenance reserves, payment of debt and interest and other lease arrangements. The following table includes our contractual obligations as of December 31, 2018 for the periods in which payments are due:

 

(in thousands)    2019      2020 - 2021      2022 - 2023      Thereafter      Total  

Current and long-term debt(1)

   $ 8,606      $ 17,008      $ 32,815      $ —        $ 58,429  

Interest obligations(2)

     728        1,440        2,773        —          4,941  

Operating lease obligations(3)

     56,624        77,667        72,155        54,776        261,222  

Capital lease obligations

     13,866        28,184        28,184        65,909        136,143  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 79,824      $ 124,299      $ 135,927      $ 120,685      $ 460,735  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes principal portion only.

(2)

Represents interest on current and long-term debt.

(3)

Represents non-cancelable contractual payment commitments for aircraft and engines, and includes non-aircraft operating lease obligations.

In addition, our aircraft leases require that we make maintenance reserve payments to cover the cost of major scheduled maintenance for these aircraft. These payments are generally variable as they are based on utilization of the aircraft, including the number of flight hours flown and/or flight departures, and are not included as minimal rental obligations in the table above. We currently estimate our obligation for maintenance reserve payments to be $279.0 million in total, including $39.2 million for 2019, $64.9 million for 2020 and 2021, $67.6 million for 2022 and 2023 and $107.3 million thereafter.

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 would cover most of our exposure to liabilities and related indemnities associated with the leases described above.

Certain of our aircraft and other financing transactions also include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these financing transactions and other agreements, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. entities to withholding taxes.

Certain of these indemnities survive the length of the related lease. We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered and the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

 

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Pass-Through Trusts. We have equipment notes outstanding issued under the 2019-01 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. Proceeds received from the sale of pass-through certificates may be initially held by a depositary in escrow for the benefit of the certificate holders until we issue equipment notes to the trust, which purchases such notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by us and are not reported as debt on our consolidated balance sheets because the proceeds held by the depositary are not our assets. We record the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates.

Fuel Consortia. We currently participate in fuel consortia at MSP and Las Vegas 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. Any costs (including remediation and spill response costs) incurred by such fuel consortia could also have an adverse impact on our business, results of operations and financial condition. These agreements are not reflected on our consolidated balance sheets.

We have no other off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by significant judgments and estimates made by management in accordance with GAAP. These estimates are based on historical experience and varying assumptions and conditions. Consequently, actual results could differ from estimates. Critical accounting policies and estimates are defined as those policies that reflect significant judgments or estimates about matters both inherently uncertain and material to our financial condition or results of operations. For a detailed discussion of our significant accounting policies, see Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for additional information.

Revenue Recognition

Scheduled Service and Ancillary Revenue. We generate the majority of our revenue from sales of passenger tickets and ancillary services along with charter sales. We initially defer ticket sales as an air traffic liability and recognize revenue when the passenger flight occurs. An unused nonrefundable ticket expires at the date of scheduled travel and is recognized as revenue at that date. Customers may elect to change their itinerary prior to departure. A change fee is assessed and recognized as ancillary revenue on the date the change is initiated and deducted from the face value of the original purchase price of the ticket and the original ticket becomes invalid. The amount remaining after deducting the change fee is a credit that can be used towards the purchase of a new ticket for up to 12 months after the original date of purchase. The recorded value of the credit is calculated based on the original value less the change fee.

We estimate and record breakage for tickets and travel credits we expect will expire unused. Estimating the amount of breakage involves subjectivity and judgment. These estimates are based on our historical experience of expired tickets and travel credits and consider other facts, such as recent aging trends, program changes and modifications that could affect the ultimate expiration patterns of tickets and travel credits.

We recognize ancillary revenue for baggage fees, seat selection fees, and on-board sales when the associated flight occurs and change fees as the transactions occur. Fees sold in advance of the flight date are initially

 

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recorded as an air traffic liability. Ancillary revenue also includes services not directly related to providing transportation, such as revenue from our Sun Country Rewards program, as described below in “—Frequent Flyer Program.”

Charter Service Revenue. Charter revenue is recognized at the time of departure when transportation is provided.

Frequent Flyer Program. The Sun Country Rewards program provides frequent flyer rewards to program members based on accumulated reward credits. Reward credits are earned as a result of travel and purchases using our co-branded credit card. The program terms include expiration of reward credits after 36 months from the date they were earned, except members who are holders of the Sun Country co-branded credit card are not subject to the expiration terms. For reward credits earned under the Sun Country Rewards program, we have an obligation to provide future services when these reward credits are redeemed.

With respect to rewards earned as a result of travel, we recognize a loyalty program liability and a corresponding sales and marketing expense as the reward credits are earned by loyalty program members, representing the incremental cost associated with the obligation to provide travel in the future. Incremental cost for reward credits to be redeemed on our flights is estimated based on historical costs, which include the cost of aircraft fuel, insurance, security, ticketing and reservation costs. We adjusted our liability for outstanding points to fair value in connection with acquisition accounting and in the Successor 2018 period, continued to adjust periodically for changes in our estimate of incremental cost, program redemption terms and breakage estimates.

For points earned from purchases using our co-branded credit card, we record frequent flyer expense using a multiple-element approach. The fair value of a point is based on our program terms for frequent flyer rewards. We recognize the portion from the sale of points attributed to the marketing element as other revenue associated with the other marketing services delivered.

We estimate breakage for reward credits that are not likely to be redeemed. A change in assumptions as to the period over which reward credits are expected to be redeemed, the actual redemption activity or the estimated fair value of reward credits expected to be redeemed could have an impact on revenues in the year in which the change occurs and in future years. Current and future changes to the reward credit expiration policy or the program rules and program redemption opportunities may result in material changes to the loyalty program liability balance, as well as revenue recognized from the program.

Co-Brand Credit Card Program. Our co-branded credit card with First Bank, a division of First National Bank of Omaha, provides members with benefits which include a 50% discount on seat selection and bag fees (for the first checked bag), priority boarding, free premium drink during flight, and protections from their points expiring. We account for funds received for the advertising and marketing of the co-branded credit card and delivery of loyalty program reward credits as a multiple-deliverable arrangement. Funds received are allocated based on relative selling price. For the selling price of travel awards, we considered the terms for redemption under the Sun Country Rewards program that determine how reward credits are applied to purchase Sun Country services.

Consideration allocated to reward credits is deferred and recognized ratably as passenger revenue over the estimated period the transportation is expected to be provided, currently estimated at 18 months. Consideration allocated to the marketing and advertising element is earned as the co-branded card is used and recorded in Other revenue.

Aircraft Maintenance

Under our aircraft operating lease agreements and FAA operating regulations, we are obligated to perform all required maintenance activities on our fleet, including component repairs, scheduled airframe checks and major engine restoration events. Significant maintenance events include periodic airframe checks, engine

 

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overhauls, limited life parts replacement and overhauls to major components. Certain maintenance functions are performed by third-party specialists under contracts that require payment based on a utilization measure such as flight hours.

For owned aircraft and engines, we account for significant maintenance under the built-in overhaul method. Under this method, the cost of airframes and engines (upon which the planned significant maintenance activity is performed) is segregated into those costs that are to be depreciated over the expected useful life of the airframes and engines and those that represent the estimated cost of the next planned significant maintenance activity. Therefore, the estimated cost of the first planned significant maintenance activity is separated from the cost of the remainder of the airframes and engines and amortized to the date of the initial planned significant maintenance activity. The cost of that first planned major maintenance activity is then capitalized and amortized to the next occurrence of the planned major maintenance activity, at which time the process is repeated. The estimated period until the next planned significant maintenance event is estimated based on assumptions including estimated cycles, hours, and months, required maintenance intervals, and the age and condition of related parts.

These assumptions may change based on changes in the utilization of our aircraft, changes in government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine or major component to a level that would require a significant maintenance event prior to a scheduled maintenance event. To the extent the estimated timing of the next maintenance event is extended or shortened, the related depreciation period would be lengthened or shortened prospectively, resulting in lower depreciation expense over a longer period or higher depreciation expense over a shorter period, respectively.

For leased aircraft, we expense maintenance as incurred. Routine cost for maintaining the airframes and engines and line maintenance are charged to maintenance expense as performed.

Maintenance Reserves. Our aircraft lease agreements provide that we pay maintenance reserves to aircraft lessors to be held as collateral in advance of our required performance of significant maintenance events. Our lease agreements with maintenance reserve requirements provide that maintenance reserves are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of either (1) the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance event. Some portions of the maintenance reserve payments are fixed contractual amounts, while others are based on a utilization measure, such as actual flight hours or cycles.

At lease inception and at each annual balance sheet date, we assess whether the maintenance reserve payments required by the lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance reserves expected to be recovered from lessors are reflected as lessor maintenance deposits on the consolidated balance sheets. When it is not probable that we will recover amounts paid, such amounts are expensed as a component of aircraft rent expense in our consolidated statements of operations.

We make various assumptions to determine the recoverability of maintenance reserves, such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor and the number of flight hours and cycles the aircraft is estimated to be utilized before it is returned to the lessor. Changes in estimates are accounted for on a cumulative catch-up basis.

Goodwill and Indefinite-Lived Intangible Assets

We apply a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets at least annually, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. We assess the value of goodwill and indefinite-lived assets under either a qualitative or, if necessary, a quantitative approach.

 

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Under a qualitative approach, we consider various market factors, including applicable key assumptions listed below. These factors are analyzed to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. Factors which could indicate an impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot access), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.

If our qualitative assessment indicates that it is more likely than not that goodwill or indefinite-lived intangible assets are impaired, we must perform a quantitative test that compares the fair value of the asset with its carrying amount.

In the event that we need to apply a quantitative approach for evaluating goodwill for impairment, we estimate the fair value of the reporting unit by considering both market capitalization and projected discounted future cash flows (an income approach). Key assumptions and estimates made in estimating the fair value include: (i) a projection of revenues, expenses and cash flows; (ii) terminal period revenue growth and cash flows; (iii) an estimated weighted average cost of capital; (iv) an assumed discount rate depending on the asset; (v) a tax rate; and (vi) market prices for comparable assets. In the event that we need to apply a quantitative approach for evaluating our indefinite-lived intangible assets for impairment, we estimate the fair value based on the relief from royalty method for the Sun Country trade name. The relief from royalty methodology values the asset based on the assumed royalty rate the business would pay to achieve the revenues associated with that asset if the asset was not owned.

For either goodwill or indefinite-lived assets, if the carrying value of the asset exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

We believe these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made.

Long-Lived Assets

In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. In estimating the useful lives and residual values of our aircraft, we have relied upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Our long-lived assets are evaluated for impairment when events and circumstances indicate the assets may be impaired. Indicators may include operating or cash flow losses, significant decreases in market value, or changes in technology.

Management Options Valuation

Subsequent to granting options to certain members of our management team, the fair values of the shares of SCA common stock underlying our options were determined on each grant date by our board of directors with input from management and with the assistance of a third-party valuation advisor. In order to determine the fair value, our board of directors considered, among other things, contemporaneous valuations of our SCA common stock prepared by the unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company

 

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Equity Securities Issued as Compensation, or the Practice Aid. Given the absence of a public trading market of our capital stock, the assumptions used to determine the estimated fair value of our SCA common stock was based on a number of objective and subjective factors, including:

 

   

our stage of development and business strategy;

 

   

our business, financial condition and results of operations, including related industry trends affecting our operations;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions;

 

   

the lack of marketability of our SCA common stock;

 

   

the market performance of comparable publicly traded companies; and

 

   

U.S. and global economic and capital market conditions and outlook.

The fair value of the time-based stock options granted during 2018 and 2019 was estimated using the Black-Scholes option-pricing model with expected term based on vesting criteria and time to expiration. The expected volatility was based on historical volatility of stock prices and assets of a public company peer group. The risk-free interest rate was based on the implied risk-free rate using the expected term and yields of U.S Treasury stock and S&P bond yields.

The fair value of the performance-based stock options granted during 2018 and 2019 was estimated by simulating the future stock price using geometric brownian motion and risk-free rate of return at intervals specified in the grant agreement. The number of shares vested and future price at each interval were recorded for each simulation and then multiplied together and discounted to present value at the risk-free rate of return.

Our enterprise value was estimated by using market multiples and a discounted cash flow analysis based on plans and estimates used by management to manage the business. We evaluated comparable publicly traded companies in the airline industry. We used market multiples after considering the risks associated with the strategic shift in our business, the availability of financing, labor relations and an intensely competitive industry. The estimated value was then discounted by a non-marketability factor due to the fact that stockholders of private companies do not have access to trading markets similar to those available to stockholders of public companies, which impacts liquidity.

The determination of the fair values of our non-public shares of SCA common stock and stock-based awards are based on estimates and forecasts described above that may not reflect actual market results. These estimates and forecasts require us to make judgments that are highly complex and subjective. Additionally, past valuations relied on reference to other companies for the determination of certain inputs. After completion of this offering, future stock-based grant values will be based on quoted market prices.

Quantitative and Qualitative Disclosure About Market Risk

We are subject to market risks in the ordinary course of our business. These risks include commodity price risk, specifically with respect to aircraft fuel, as well as interest rate risk. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Aircraft Fuel. Unexpected pricing changes of aircraft fuel could have a material adverse effect on our business, results of operations and financial condition. To hedge the economic risk associated with volatile aircraft fuel prices, we periodically enter into fuel collars, which allows us to reduce the overall cost of hedging, but may prevent us from participating in the benefit of downward price movements. In the past, we have also

 

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entered into fuel option and swap contracts. As of December 31, 2019, we had fuel collar hedges in place for approximately     % of our projected fuel requirements for scheduled service operations in 2020, with all of our then existing options expected to be exercised or expire by the end of 2021. We do not hold or issue option or swap contracts for trading purposes. We expect to continue to enter into these types of contracts prospectively, although significant changes in market conditions could affect our decisions. Based on our 2020 forecasted fuel consumption as of December 31, 2019, we estimate that a one cent per gallon increase in average aircraft fuel price would increase our 2020 annual aircraft fuel expense by $        million, excluding any impact associated with fuel derivative instruments held.

Interest Rates. We have exposure to market risk associated with changes in interest rates related to the interest income from our short-term investment portfolio. A change in market interest rates would impact interest income earned on our cash and equivalents and short-term investments. Assuming our cash and equivalents and short-term investments remain at December 31, 2018 balances, a 100 basis point decrease in interest rates would result in a corresponding decrease in interest income of approximately $         million during 2019.

JOBS Act Accounting Election

In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our audited financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (United States) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. We may remain an “emerging growth company” until the last day of the fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue equals or exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an “emerging growth company” prior to the end of such five-year period.

Recent Accounting Pronouncements

See Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for recently issued accounting pronouncements adopted in 2018 and 2019 or not yet adopted as of the date of this prospectus.

 

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INDUSTRY

The U.S. airline industry has consolidated significantly over the last two decades. In 2000, the four largest U.S. carriers controlled approximately 59% of the domestic market, based on number of available seats, and there were 11 additional airlines of significant size competing in a fragmented market. As a result of the consolidation in the sector, the four largest U.S. carriers control approximately 78% of the market as of 2018 and there are seven additional airlines of significant size competing in what is now a more consolidated market. This shift has been principally driven by a number of business combinations which have reshaped the domestic landscape: Delta Air Lines combined with Northwest Airlines in 2008, United Airlines combined with Continental Airlines in 2010, Southwest Airlines acquired AirTran Airlines in 2010, American Airlines (following its Acquisition of Trans World Airlines in 2001) combined with US Airways in 2013 (following its combination with America West Airlines in 2005) and Alaska Airlines acquired Virgin America in 2016. Consolidation has benefitted the U.S. airline sector, which has seen RASM increase from $11.12 cents in 2000 to $14.81 cents in 2018, while according to BTS, the average domestic air fare has climbed from $156 to $168 over the same period. As a result, the U.S. airline industry has recorded $82 billion of cumulative net income from 2008 through 2018.

U.S. airlines can broadly be divided into legacy network airlines, LCCs and ULCCs. While each major airline based in the United States generally competes with each other for airline passengers traveling on the routes they serve, particularly customers traveling in economy or similar classes of service, these categories identify the operating strategies of these airlines.

The legacy network airlines, including United Airlines, Delta Air Lines and American Airlines, serve a large business travel customer base and offer scheduled flights to most large cities within the United States and abroad (directly or through membership in one of the global airline alliances) and also serve numerous smaller cities. These airlines operate predominantly through a “hub-and-spoke” network route system. This system concentrates most of an airline’s operations in a limited number of hub cities, serving other destinations in the system by providing one-stop or connecting service through hub airports to end destinations on the spokes. Such an arrangement enables travelers to fly from a given point of origin to more destinations without switching airlines. While hub-and-spoke systems result in low marginal costs for each incremental passenger, they also result in high fixed costs. The unit costs incurred by legacy network carriers to provide the gates, airport ground operations and maintenance facilities needed to support a hub-and-spoke operation are generally higher than those of the point-to-point network typically operated by LCCs and ULCCs. Aircraft schedules at legacy network carriers also tend to be inefficient to meet the requirements of connecting banks of flights in hubs, resulting in lower aircraft and crew utilization. Serving a large number of markets of different sizes requires the legacy carriers to have multiple fleets with multiple aircraft types along with the related complexities and additional costs for crew scheduling, crew training and maintenance. As a result, legacy network carriers typically have higher cost structures than LCCs and ULCCs due to, among other things, higher labor costs, flight crew and aircraft scheduling inefficiencies, concentration of operations in higher cost airports, and the offering of multiple classes of services, including multiple premium classes of service.

In contrast, the LCC model focuses on operating a more simplified operation, providing point-to-point service without the high fixed costs required for a hub-and-spoke system. The lower cost structure of LCCs enables them to offer flights to and from many of the same markets as the major airlines at lower fares, though LCCs sometimes serve major markets through secondary, lower-cost airports in the same region. LCCs typically fly direct, point-to-point flights, which enables improved aircraft and crew scheduling efficiency. Many LCCs provide only a single class of service, thereby avoiding the incremental cost of offering premium-class services. Finally, LCCs, tend to operate fleets with very few aircraft families in order to maximize the utilization of flight crews across the fleet, to improve aircraft scheduling flexibility and to minimize inventory and aircraft maintenance costs. The major U.S. based airlines that define themselves as LCCs include Southwest Airlines and JetBlue Airways.

 

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The ULCC model, which was pioneered by Ryanair in Europe and Spirit Airlines in the United States, was built on the LCC model, but combined with a focus on increased aircraft utilization, increased seat density and the unbundling of revenue sources aside from ticket prices with multiple products and services offered for purchase by the customer at additional cost. ULCCs have lower unit costs than the legacy network carriers or the LCCs. In addition, ULCCs are capable of driving significant increases in passenger volumes as a result of their low base fares. The major U.S. based airlines that define themselves as ULCCs include Spirit Airlines, Allegiant Travel Company and Frontier Airlines.

Within the broader U.S. charter market, which includes business jets, widebody and narrowbody charters, Sun Country exclusively focuses on the narrowbody segment. The narrowbody charter segment has experienced steady growth over the recent years posting a 6.1% CAGR over the 2013-2018 period and reaching approximately $1.2 billion market size as of 2018.

On the demand side, key customer segments within the U.S. narrowbody charter market include casinos and tour groups, the U.S. Department of Defense, sports teams (both professional and college teams) and other government customers. As of 2018, we had strong market positions in the casinos and tours customer segments, the U.S. Department of Defense and college sports customer segments with an estimated market share of approximately 33%, 29% and 18%, respectively. These customer segments are primarily comprised of large, high-budget organizations with recurring (in some cases even long term contracted) and resilient spend. The typical contract generally provides for the customer to pay a fixed charter fee insurance, landing fees, navigation fees and most other operational fees and cost. Fuel costs are contractually passed through to the customer, enhancing margins and removing commodity risk from the operators.

On the supply side, the market is fragmented and primarily served by pure play charter operators that typically operate small fleets and serve relatively small networks across the country. The reduced fleet size and network scale of pure play charter operators results in limited reserve aircraft to react to unexpected problems and schedule changes. Larger, high-budget and enduring charter customers primarily seek operational reliability and aircraft and crew availability to serve their planned and on-demand needs. In light of these specific needs, the size, scale, and reach of the network are key strategic advantages to compete in the charter market.

We believe that Sun Country represents a new breed of hybrid carrier that shares certain characteristics with Allegiant Travel Company and Southwest Airlines. Sun Country’s model includes many of the low cost structure characteristics of ULCCs, such as an unbundled product, point-to-point service and a single aircraft family fleet which allows us to maintain a cost base comparable to ULCCs. However, our product includes greater legroom, free beverage, in-flight entertainment and in-seat power that are consistent with the more elevated product of LCCs. Furthermore, we fly a flexible “peak demand” network that allows us to generate higher TRASM than ULCCs while maintaining lower CASM excluding fuel than LCCs. The only carrier in the United States that flies a similar flexible network is Allegiant Travel Company, but Allegiant flies to different markets than we do with a lesser product, smaller charter business and limited ticket distribution network through its website (closed distribution).

 

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BUSINESS

Overview

Sun Country Airlines is a Minnesota-based high-growth, low-cost air carrier focused on serving leisure passengers on flights throughout the United States and to destinations in Mexico, Central America, the Caribbean and Canada. Sun Country Airlines represents a new breed of hybrid carrier. We operate an agile network consisting of our core scheduled service business and our synergistic and profitable charter business. Our unique model dynamically deploys shared aircraft and flight crews across our service lines to generate superior returns and high margins. We optimize capacity allocation by market, time of year, day of week and line of business by shifting flying to markets during periods of high demand and away from markets during periods of low demand with far greater frequency than other airlines. The only carrier in the United States that flies a similar flexible network to us is Allegiant Travel Company, but Allegiant flies to different markets than we do with a basic product, smaller charter business and limited ticket distribution network through its website. Our model includes many of the low-cost structure characteristics of ULCCs (which include Allegiant Travel Company, Spirit Airlines and Frontier Airlines), such as an unbundled product, 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 an elevated product that we believe is superior to the ULCCs and consistent with that of LCCs (which include Southwest Airlines and JetBlue Airways). For example, our product includes more legroom, free beverages, in-flight entertainment and in-seat power, none of which are offered by the ULCCs. The combination of our agile “peak demand” network with our elevated consumer product allows us to generate higher TRASM than ULCCs while maintaining lower CASM excluding fuel unit costs than LCCs.

In April 2018, we were acquired by the Apollo Funds. Since the acquisition, we have transformed our business under a new management team of seasoned professionals who have a strong combination of low-cost and legacy network airline experience. We have redesigned our network to focus our flying on peak demand opportunities at both our Minneapolis/St. Paul, or MSP, hub and our growing network of non-MSP point-to-point markets, which has supported a     % increase in passengers from 2017 to 2019. We have greatly expanded our ancillary products and services, increasing average ancillary revenue per scheduled service passenger by over     % from 2017 to 2019. Since 2017, management has taken actions to reduce our cost basis by approximately $34 million on an annual basis, contributing to a reduction in CASM excluding fuel of over     % between 2017 and 2019. We have invested over $115 million in new aircraft, new interiors, IT systems and other growth-oriented capital expenditure projects since the beginning of 2017. In June 2019, we introduced a new website and replaced our reservation and distribution system with the Navitaire system, which has lowered our selling costs, increased the proportion of our bookings that are made directly through our website and simplified the process of buying tickets and changing flight details post-purchase. We believe that these investments have positioned us to profitably grow our business in the long term and that our period of heavy investment in transformative capital spending is behind us for the foreseeable future.

Our network transformation has focused on increasing routes flown while allocating our assets to the most profitable lines of flying. We concentrate scheduled service trips during the highest yielding months of the year and days of the week, and we allocate aircraft to charter service when it is more profitable to do so. As a result, in 2019 only     % of our routes were daily year-round, compared to an average of     % among mainline U.S. passenger airlines. Although this scheduling approach produces lower fleet utilization than most of our peers, it generates significantly higher total revenue per available seat mile, or TRASM. In addition to network changes, we have invested in new aircraft interiors, including the removal of a legacy first class section and the replacement of older seats on all of our 737-800 aircraft with new comfortable, full-recline seats. We have increased the average seat count on our 737-800s from 162 to 186 while still offering an average pitch, defined as the distance from the back of a seat to the back of the seat directly in front of it, of 31 inches, which is comparable legroom to Southwest Airlines and greater legroom than all of our ULCC competitors. We have also installed in-seat power and provide complimentary in-flight entertainment streamed to passengers’ devices, features that are comparable to those offered by our LCC competitors and that are not offered by any of our ULCC competitors, providing our passengers with a preferred onboard experience. As part of our transformation, we have greatly increased our level of ancillary product sales, which consist of baggage fees, seat assignment fees and other fees. Our dynamic scheduling strategy, preferred product and focus on ancillary revenue generation have allowed us to produce unit revenue, as measured by TRASM, of        cents for the year ended December 31, 2019, which is comparable to LCCs and higher than ULCCs.

 

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Our business transformation has also focused heavily on unit cost reduction. We have achieved cost savings by renegotiating certain key contracts and agreements, outsourcing certain functions to third-party service providers, reducing the cost of our fleet through more efficient aircraft sourcing and financing, staffing efficiencies and other cost-saving initiatives. As a result of these savings and the seat densification of our aircraft, our CASM excluding fuel has decreased from 7.79 cents for the year ended December 31, 2017 to      cents for the year ended December 31, 2019. Our CASM excluding fuel is comparable to ULCCs despite us flying a lower utilization network. We believe that we are well-positioned to continue reducing our unit costs as we grow through ongoing strategic initiatives and realize greater economies of scale. In addition, our low cost, leisure focused business models similar to ours have been more resilient during economic downturns compared to business models adopted by legacy carriers.

Our transformation has resulted in rapid growth and significant improvements to our financial results. From 2017 to 2019, our average fleet count has increased from 23.4 to             aircraft, our available seat miles have increased by approximately     % and our revenue has increased by approximately     %. In 2019, our total revenue was approximately $             million, our net income was approximately $             million, our Adjusted Net Income was approximately $            million, our Adjusted EBITDAR was approximately $            million and we had positive free cash flow, which we define as operating cash flow minus capital expenditures.

Our New Contract with Amazon

On December 13, 2019, we signed a six-year contract (with two, two-year extension options, for a maximum term of 10 years) with Amazon to provide them with air cargo services. Flying under the ATSA is expected to begin in the second quarter of 2020 and be fully ramped up by the fourth quarter of 2020, at which point Amazon will have up to 10 Boeing 737-800 cargo aircraft flown by Sun Country.

Our Competitive Strengths

We believe that the following key strengths allow us to compete successfully within the U.S. airline industry.

Agile “Peak Demand” Scheduling Strategy. We flex our capacity by day of the week, month of the year and line of business to capture what we believe are the most profitable flying opportunities available from both our MSP home market and our growing network of non-MSP markets. As a result, our route network varies widely throughout the year. For the year ended December 31, 2019, we flew approximately     % more of our capacity during our top 100 peak demand days of the year as compared to the remaining days of the year. For 2019, our average fare was approximately     % higher on our top 100 peak demand days as compared to the remaining days of the year. In 2019, only     % of our routes were daily year round, compared to     % for Frontier Airlines,     % for Allegiant Travel Company,     % for Spirit Airlines and     % for Southwest Airlines. The following charts demonstrate that our schedule is highly variable by day of week and month of year.

 

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In addition to shifting aircraft across our network by season and day of week, we also shift between our schedu