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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-40217

Graphic

Sun Country Airlines Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

82-4092570

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2005 Cargo Road

Minneapolis, Minnesota

55450

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (651) 681-3900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNCY

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

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 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Number of shares outstanding by each class of common stock, as of September 30, 2021:

Common Stock, $0.01 par value – 57,551,741 shares outstanding

Table of Contents

Sun Country Airlines Holdings, Inc.

Form 10-Q

Table of Contents

    

Page

Part I. Financial Information

Item 1. Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

5

Condensed Consolidated Statements of Changes in Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to the Condensed Consolidated Financial Statements

8

1

Company Background

8

2

Basis of Presentation

9

3

Impact of the COVID-19 Pandemic

10

4

Revenue

12

5

Earnings per Share

14

6

Aircraft

15

7

Debt

18

8

Fuel Derivatives and Risk Management

20

9

Fair Value Measurements

21

10

Income Taxes

22

11

Special Items, net

23

12

Commitments and Contingencies

24

13

Operating Segments

24

14

Subsequent Events

25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

57

Item 4. Controls and Procedures

57

Part II. Other Information

Item 1. Legal Proceedings

58

Item 1A. Risk Factors

58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3. Defaults Upon Senior Securities

70

Item 4. Mine Safety Disclosures

70

Item 5. Other Information

70

Item 6. Exhibits

71

Signatures

72

- 2 -

Table of Contents

PART I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

September 30, 2021

    

December 31, 2020

(Unaudited)

ASSETS

  

  

Current Assets:

 

  

 

  

Cash and Cash Equivalents

$

275,332

$

62,028

Restricted Cash

 

15,693

 

8,335

Investments

 

5,997

 

5,624

Accounts Receivable, net of an allowance for credit losses of $232 and $224, respectively

 

31,221

 

28,690

Short-term Lessor Maintenance Deposits

 

 

3,101

Inventory, net of a reserve for obsolescence of $1,257 and $996, respectively

 

5,496

 

5,407

Prepaid Expenses

 

11,155

 

8,002

Derivative Assets

 

248

 

Other Current Assets

 

1,299

 

5,553

Total Current Assets

 

346,441

 

126,740

Property & Equipment, net:

 

  

 

  

Aircraft and Flight Equipment

 

435,901

 

331,685

Leasehold Improvements and Ground Equipment

 

19,005

 

13,526

Computer Hardware and Software

 

8,459

 

7,845

Finance Lease Assets

 

189,689

 

117,833

Rotable Parts

 

9,331

 

8,691

Property & Equipment

 

662,385

 

479,580

Accumulated Depreciation & Amortization

 

(101,356)

 

(65,065)

Total Property & Equipment, net

 

561,029

 

414,515

Other Assets:

 

  

 

  

Goodwill

 

222,223

 

222,223

Other Intangible Assets, net

 

90,110

 

93,110

Operating Lease Right-of-use Assets

 

65,215

 

121,269

Aircraft Deposits

 

9,092

 

10,253

Long-term Lessor Maintenance Deposits

 

23,226

 

22,584

Deferred Tax Asset

 

19,149

 

36,216

Other Assets

 

5,828

 

6,357

Total Other Assets

 

434,843

 

512,012

Total Assets

$

1,342,313

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

- 3 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

September 30, 2021

    

December 31, 2020

(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

 

  

 

  

Accounts Payable

$

35,676

$

34,035

Accrued Salaries, Wages, and Benefits

 

21,718

 

16,368

Accrued Transportation Taxes

 

8,882

 

5,883

Air Traffic Liabilities

 

105,048

 

101,075

Derivative Liabilities

 

 

1,174

Over-market Liabilities

 

4,309

 

9,281

Finance Lease Obligations

 

9,740

 

11,460

Loyalty Program Liabilities

 

10,175

 

7,016

Operating Lease Obligations

 

17,353

 

34,492

Current Maturities of Long-term Debt

 

19,835

 

26,118

Other Current Liabilities

 

8,884

 

6,841

Total Current Liabilities

 

241,620

 

253,743

Long-term Liabilities:

 

  

 

  

Over-market Liabilities

 

11,505

 

28,128

Finance Lease Obligations

 

164,902

 

95,710

Loyalty Program Liabilities

 

10,136

 

15,053

Operating Lease Obligations

 

63,139

 

112,707

Long-term Debt

 

266,985

 

256,345

Income Tax Receivable Agreement Liability

 

95,400

 

Other Long-term Liabilities

 

5,746

 

7,764

Total Long-term Liabilities

 

617,813

 

515,707

Total Liabilities

 

859,433

 

769,450

Commitments and Contingencies

 

  

 

  

Stockholders' Equity:

 

  

 

  

Common Stock

 

 

Common stock with $0.01 par value, 995,000,000 shares authorized, 57,551,741 and 46,839,659 issued and outstanding at September 30, 2021 and December 31, 2020, respectively.

 

576

 

468

Preferred Stock

Preferred stock with $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020.

Loans to Stockholders

 

 

(3,500)

Additional Paid In Capital

 

481,108

 

248,525

Retained Earnings

 

1,196

 

38,324

Total Stockholders' Equity

 

482,880

 

283,817

Total Liabilities and Stockholders' Equity

$

1,342,313

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

- 4 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Operating Revenues:

 

  

 

  

  

 

  

Passenger

$

147,718

$

62,472

$

377,042

$

272,299

Cargo

 

24,400

 

14,272

68,084

 

17,491

Other

 

1,545

 

1,229

5,338

 

3,889

Total Operating Revenue

 

173,663

 

77,973

450,464

 

293,679

Operating Expenses:

 

  

 

  

 

  

 

  

Aircraft Fuel

 

36,647

 

13,139

 

90,631

 

69,377

Salaries, Wages, and Benefits

 

43,424

 

36,348

 

129,815

 

106,923

Aircraft Rent

 

3,925

 

6,410

 

13,339

 

23,376

Maintenance

 

9,660

 

6,338

 

30,170

 

15,242

Sales and Marketing

 

5,470

 

2,921

 

16,402

 

13,123

Depreciation and Amortization

 

14,029

 

12,929

 

40,103

 

35,631

Ground Handling

 

7,873

 

4,880

 

19,654

 

15,786

Landing Fees and Airport Rent

 

12,069

 

8,596

 

29,606

 

22,377

Special Items, net

 

(65)

 

(32,852)

 

(65,456)

 

(64,333)

Other Operating, net

 

18,629

 

10,447

 

50,026

 

34,363

Total Operating Expenses

 

151,661

 

69,156

 

354,290

 

271,865

Operating Income

 

22,002

 

8,817

 

96,174

 

21,814

Non-operating Income (Expense):

 

  

 

  

 

  

 

  

Interest Income

 

28

 

26

 

52

 

340

Interest Expense

 

(6,286)

 

(5,157)

 

(19,487)

 

(16,215)

Other, net

 

456

 

164

 

18,505

 

(331)

Total Non-operating Income (Expense), net

 

(5,802)

 

(4,967)

 

(930)

 

(16,206)

Income before Income Tax

 

16,200

 

3,850

 

95,244

 

5,608

Income Tax Expense

 

2,297

 

923

 

17,172

 

1,470

Net Income

$

13,903

$

2,927

$

78,072

$

4,138

Net Income per share to common stockholders:

 

  

 

  

 

  

 

  

Basic

$

0.24

$

0.06

$

1.44

$

0.09

Diluted

$

0.23

$

0.06

$

1.33

$

0.09

Shares used for computation:

 

  

 

  

 

  

 

  

Basic

 

57,355,104

 

46,805,950

 

54,368,231

 

46,805,950

Diluted

 

61,712,378

 

48,350,943

 

58,699,991

 

48,350,943

See accompanying Notes to Condensed Consolidated Financial Statements

- 5 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Nine Months Ended September 30, 2020

Common Stock

Loans to

Additional

Retained

    

Warrants

    

Shares

    

Amount

    

Stockholders

    

Paid-in Capital

    

Earnings

    

Total

December 31, 2019

 

40,005,885

 

6,800,065

$

68

$

(3,500)

$

244,928

$

42,228

$

283,724

Exercise of Apollo Warrants

 

(40,005,885)

 

40,005,885

 

400

 

 

(379)

 

 

21

Net Income

 

 

 

 

 

 

7,251

 

7,251

Stock-based Compensation

369

369

March 31, 2020

46,805,950

$

468

$

(3,500)

$

244,918

$

49,479

$

291,365

Net Loss

(6,040)

(6,040)

Stock-based Compensation

 

 

 

 

 

388

 

 

388

June 30, 2020

46,805,950

$

468

$

(3,500)

$

245,306

$

43,439

$

285,713

Net Income

2,927

2,927

Amazon Warrants

933

933

Stock-based Compensation

496

496

September 30, 2020

 

 

46,805,950

$

468

$

(3,500)

$

246,735

$

46,366

$

290,069

Nine Months Ended September 30, 2021

Retained

    

Common Stock

Loans to

    

Additional

    

Earnings

Shares

    

Amount

    

Stockholders

Paid-in Capital

(Deficit)

    

Total

December 31, 2020

 

46,839,659

$

468

$

(3,500)

$

248,525

$

38,324

$

283,817

Shares Surrendered by Stockholders

 

(140,737)

 

(1)

 

3,500

 

(3,499)

 

 

Initial Public Offering

 

10,454,545

 

105

 

 

224,552

 

 

224,657

Net Income

 

 

 

 

 

12,416

 

12,416

Income Tax Receivable Agreement

 

 

 

 

 

(115,200)

 

(115,200)

Amazon Warrants

 

 

 

 

1,400

 

 

1,400

Stock-based Compensation

 

 

 

 

2,870

 

 

2,870

March 31, 2021

57,153,467

$

572

$

$

473,848

$

(64,460)

$

409,960

Initial Public Offering Expense Adjustment

349

349

Exercise of Stock Options

5,000

27

27

Net Income

51,753

51,753

Amazon Warrants

1,400

1,400

Stock-based Compensation

744

744

June 30, 2021

57,158,467

$

572

$

$

476,368

$

(12,707)

$

464,233

Exercise of Stock Options

393,274

4

2,376

2,380

Net Income

13,903

13,903

Amazon Warrants

1,400

1,400

Stock-based Compensation

964

964

September 30, 2021

 

57,551,741

$

576

$

$

481,108

$

1,196

$

482,880

See accompanying Notes to Condensed Consolidated Financial Statements

- 6 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

    

Nine Months Ended September 30, 

    

2021

    

2020

Net Income

$

78,072

$

4,138

Adjustments to reconcile Net Income to Cash from Operating Activities:

 

 

  

Depreciation and Amortization

 

40,103

 

35,631

Tax Receivable Agreement Adjustment

(19,800)

Reduction in Operating Lease Right-of-use Assets

 

12,920

 

19,685

Non-Cash (Gain) Loss on Asset Transactions, net

 

(12,666)

 

381

Unrealized (Gain) Loss on Fuel Derivatives

 

(3,527)

 

15,766

Amortization of Over-market Liabilities

 

(4,159)

 

(8,101)

Deferred Income Taxes

 

17,068

 

1,493

Amazon Warrants Vested

 

4,200

 

933

Stock-based Compensation Expense

 

4,577

 

1,253

Amortization of Debt Issuance Costs

 

2,187

 

1,625

Changes in Operating Assets and Liabilities:

 

  

 

  

Accounts Receivable

 

34

 

(3,141)

Inventory

 

(456)

 

(696)

Prepaid Expenses

 

(3,153)

 

(409)

Lessor Maintenance Deposits

 

(5,464)

 

(8,293)

Aircraft Lease Deposits

 

1,162

 

1,290

Other Assets

 

2,297

 

(4,396)

Accounts Payable

 

2,257

 

(9,092)

Accrued Transportation Taxes

 

2,999

 

(10,527)

Air Traffic Liabilities

 

3,972

 

(18,262)

Loyalty Program Liabilities

 

(1,759)

 

(769)

Reduction in Operating Lease Obligations

 

(19,983)

 

(19,078)

Other Liabilities

 

8,514

 

4,122

Net Cash Provided by Operating Activities

 

109,395

 

3,553

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property & Equipment

 

(111,053)

 

(94,307)

Purchase of Investments

 

(1,436)

 

(427)

Proceeds from the Sale of Investments

 

1,062

 

523

Net Cash Used in Investing Activities

 

(111,427)

 

(94,211)

Cash Flows from Financing Activities:

 

  

 

  

Cash Received from Stock Offering

 

235,894

 

Costs of Stock Offering

 

(8,706)

 

Proceeds from Stock Option and Warrant Exercises

 

2,407

 

21

Proceeds from Borrowings

 

80,500

 

220,307

Repayment of Finance Lease Obligations

 

(9,113)

 

(84,742)

Repayment of Borrowings

 

(75,728)

 

(55,594)

Debt Issuance Costs

 

(2,560)

 

(3,279)

Net Cash Provided by Financing Activities

 

222,694

 

76,713

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash

 

220,662

 

(13,945)

Cash, Cash Equivalents and Restricted Cash--Beginning of the Period

 

70,363

 

64,478

Cash, Cash Equivalents and Restricted Cash--End of the Period

$

291,025

$

50,533

Supplemental information:

 

  

 

  

Cash Payments for Interest

$

14,521

$

12,027

Cash Payments for Income Taxes, net

$

144

$

34

Non-cash transactions:

 

  

 

  

Lease Deposits Applied Against the Purchase of Aircraft

$

3,296

$

Aircraft and Flight Equipment Acquired through Finance Leases

$

71,856

$

Purchases of Property & Equipment in Accounts Payable

$

$

648

The following provides a reconciliation of Cash, Cash Equivalents and Restricted Cash to the amounts reported on the Condensed Consolidated Balance Sheets:

September 30, 2021

September 30, 2020

Cash and Cash Equivalents

$

275,332

$

44,288

Restricted Cash

 

15,693

 

6,245

Total Cash, Cash Equivalents and Restricted Cash

$

291,025

$

50,533

See accompanying Notes to Condensed Consolidated Financial Statements

- 7 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

1.

COMPANY BACKGROUND

Sun Country Airlines Holdings, Inc. is the parent company of Sun Country, Inc., which is a certificated air carrier providing scheduled passenger service, air cargo service, charter air transportation and related services. Services are provided to the general public, cargo customers, military branches, wholesale tour operators, individual entities, schools and companies for air transportation to various U.S. and international destinations. Except as otherwise stated, the financial information, accounting policies, and activities of Sun Country Airlines Holdings, Inc. are referred to as those of the Company (the “Company” or “Sun Country”).

Stock Split

In March 2021, the Company effected an approximately 18.8886 for 1 stock split of its common stock (the “Stock Split”), with exercise prices for outstanding warrants and options adjusted accordingly by dividing such prices by the Stock Split ratio. The par value of the common stock was not adjusted as a result of the Stock Split. As a result of the Stock Split, the Company issued an additional 44,226,587 shares of common stock. All references to common stock, warrants to purchase common stock, stock options, per share amounts and related information contained in the accompanying Condensed Consolidated Financial Statements and applicable disclosures have been retroactively adjusted to reflect the effect of the Stock Split for all periods.

Approval of the Omnibus Incentive Plan

In March 2021, the stockholders approved the Sun Country Airlines Holdings, Inc. 2021 Omnibus Incentive Plan (the “Plan”).  The Plan authorizes that no more than 3,600,000 shares of Common Stock may be delivered in the aggregate pursuant to Awards granted under the Plan. An “Award” means any Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Other Stock-Based Award, or Other Cash-Based Award granted under the Plan.

Upon implementation of this new Plan, there were no more grants under the October 2018 equity incentive plan. Awards already issued under the 2018 plan are not impacted by the new Plan.

Initial Public Offering of Common Stock and Other Stock Sales

On March 16, 2021, the Company priced its initial public offering of 9,090,909 shares of common stock to the public at $24.00 per share. The stock began trading on the NASDAQ on March 17, 2021 under the symbol SNCY. The underwriters had an option to purchase an additional 1,363,636 shares from the Company at the public offering price, which they exercised. In total, all 10,454,545 shares were issued on March 19, 2021 and the net proceeds to the Company were $225,006 after deducting underwriting discounts and commissions, and other offering expenses.

Concurrently with the closing of the initial public offering, SCA Horus Holdings, LLC, an affiliate of investment funds managed by affiliates of Apollo Global Management (the “Apollo Stockholder”), also completed a concurrent private placement in which the Apollo Stockholder sold 2,216,312 and 2,216,308 shares of common stock to PAR Investment Partners, L.P. and certain funds or accounts managed by an investment adviser subsidiary of Blackrock, Inc., respectively. Each of the two sales was based on an

- 8 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

aggregate purchase price of $50,000 and a price per share equal to 94% of the initial public offering price of $24.00 per share.

In May 2021, the Apollo Stockholder sold 7,250,000 shares of the Company’s common stock at a public offering price of $34.50 per share. The underwriters in this offering exercised their option to purchase an additional 1,087,500 shares at the public offering price, bringing the total offering to 8,337,500 shares. The Company incurred offering expenses of $640 and did not receive any of the proceeds from the offering. All proceeds went to the Apollo Stockholder.

In October 2021, the Apollo Stockholder and Jude Bricker, the Company’s Chief Executive Officer (together, the “Selling Stockholders”), sold a total of 8,500,000 shares of the Company’s common stock at a public offering price of $32.50 per share. In addition, the Selling Stockholders and another existing stockholder of the Company granted the underwriters a 30-day option to purchase up to 1,275,000 additional shares of the Company’s common stock at the public offering price, less underwriting discounts and commissions. The Company incurred offering expenses of $641, through September 30, 2021, and did not receive any of the proceeds from the offering. All proceeds went to the Selling Stockholders.

Amazon Agreement

On December 13, 2019, the Company 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 cargo services under an Air Transportation Services Agreement (the “ATSA”). The agreement is structured for the Company to provide crew, maintenance, and insurance (“CMI”) services to Amazon. Sun Country began flying for Amazon in May 2020.  On June 27, 2020, Amazon and the Company signed an amendment to the December 2019 agreement that increased the number of aircraft Sun Country operates from 10 to 12.

In December 2019, in connection with the ATSA, the Company issued warrants to Amazon to purchase an aggregate of up to 9,482,606 shares of common stock at an exercise price of approximately $15.17 per share. The exercise period of these warrants is through the eighth anniversary of the issue date. Of the 9,482,606 total Amazon warrants issued, 632,183 vested upon execution of the ATSA in December 2019.  Thereafter, an additional 63,217 warrants will vest for each milestone of $8,000 in qualifying payments made by Amazon to the Company.  During the three and nine months ended September 30, 2021, 189,652 and 568,956 warrants vested, respectively. The cumulative warrants vested as of September 30, 2021 were 1,454,008. During the three and nine months ended September 30, 2020, 126,435 warrants vested.

2.

BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Sun Country Airlines Holdings, Inc. should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report for the year ended December 31, 2020, which is included in the Company’s Final Prospectus dated March 16, 2021. During the nine months ended September 30, 2021, there were no significant changes to the Company’s critical accounting policies.

Certain prior period Stockholders’ Equity amounts were reclassified to conform to the current period presentation. This involved reducing the Common Stock values to $0.01 times the shares outstanding and

- 9 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

reclassifying those dollars to Additional Paid-In Capital. These reclasses were $238,694 as of the end of each quarter in fiscal year 2020. The reclass as of December 31, 2019 was $239,073.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. All material intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Significant areas of judgment relate to passenger revenue recognition, maintenance under the built-in overhaul method, equity-based compensation, tax receivable agreement, lease accounting, impairment of goodwill, impairment of long-lived and intangible assets, air traffic liabilities, the loyalty program, as well as the valuation of Amazon warrants.

Due to severe impacts from the global coronavirus (“COVID-19”) pandemic, seasonal variations in the demand for air travel, the volatility of aircraft fuel prices and other factors, operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of operating results for future quarters or for the year ending December 31, 2021. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, unemployment levels, corporate travel budgets, extreme or severe weather and natural disasters, disease outbreaks, fears of terrorism or war, and other factors beyond the Company’s control.

The Company operates its fiscal year on a calendar year basis.

Recently Adopted Accounting Standards

Income Taxes-Simplifying the Accounting for Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions related to the approach for intraperiod tax allocation, recognizing deferred tax liabilities for outside basis differences, and calculating income taxes in interim periods. The guidance also reduces complexity in certain areas, including franchise taxes that are partially based on income and accounting for tax law changes in interim periods. The standard was adopted prospectively effective January 1, 2021 and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

3.

IMPACT OF THE COVID-19 PANDEMIC

On March 11, 2020 the World Health Organization declared COVID-19 a global pandemic causing a massive market disruption to the aviation industry.  While U.S. domestic passenger volumes have increased to date, those levels are still down when compared to the same time frame in 2019.  The growth in the U.S. domestic air traffic since the trough in April 2020 has been led by leisure and visiting family and relatives (“VFR”) travelers as business travel remains more subdued with corporate workforces continuing to “work-from-home” and in-person meetings continuing to be conducted via videoconferencing and other virtual channels.  Equity research analysts and other industry executives believe that the positive trends in leisure and VFR travel will continue as COVID-19 vaccines continue to become more widely distributed in 2021.  COVID-19 vaccines have become widely available in the U.S. according to the Centers for Disease Control and Prevention (“the CDC”).

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company continues to see many countries impose strict international travel restrictions, mandatory quarantines and/or COVID testing upon return from international travel that replaces prior travel restrictions. The U.S. market has recovered significantly faster than most other countries as a result of widespread vaccine distribution igniting the leisure travel recovery.  However, given the uncertainty regarding COVID-19 variants, including but not limited to the Delta variant, the demand recovery may be impacted in both international and domestic travel.

U.S. passenger airlines have taken significant measures in response to the COVID-19 pandemic to maintain the health and safety of their employees and customers. Airlines have added new pre-boarding, boarding and in-flight procedures such as pre-flight health questionnaires and screenings, contactless check-in and luggage drop off, enhanced aircraft cleaning procedures, mandatory face masks for employees and passengers. These measures may have minimized the risk of infection while onboard and have increased customer confidence in safely returning to fly. Pre-and post-flight COVID-19 rapid testing has also been introduced as an additional tool to avoid mandatory quarantine periods for international and some domestic travel. This rapid testing, along with widely distributed vaccines, now mandated for airline workers, facilitate the recovery in air passenger traffic as travel restrictions are lifted across the globe.

Since the beginning of the COVID-19 pandemic, the air cargo market has experienced solid growth both in terms of volumes and yields. While the pandemic has caused a worldwide economic recession, e-commerce has thrived due to a variety of factors. Air cargo operators have been in a unique position to meet e-commerce demands that require a high level of speed, reliability, and security.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020, the CARES Act was passed by the U.S. Government. The provisions in the CARES Act provide for economic relief to eligible individuals and businesses affected by COVID-19. As a provider of scheduled passenger service, air cargo service, charter air transportation and related services, the Company is eligible for and has received certain benefits outlined in the CARES Act including but not limited to payroll tax breaks, government grants and government loans.

The grant amount recognized under the CARES Act Payroll Support Program for the year ended December 31, 2020 was $62,312 and was recorded in Special Items, net. During the first half of 2021, the Company received $37,040 from the Department of Treasury ("Treasury") under the Payroll Support Program Extension (“PSP2”). Further, in the first half of 2021, the Company received a grant of $34,547 under the American Rescue Plan Act of 2021 (“PSP3”) that was enacted on March 11, 2021, and authorizes  the Treasury to provide additional assistance to passenger air carriers and contractors that received financial assistance under the CARES Act. During the three months ended September 30, 2021, no CARES Act grants were received. The grant amounts recognized in the nine months ended September 30, 2021 under the CARES Act of $71,587 were recorded in Special Items, net.

The CARES Act provides an employee retention credit (“CARES Employee Retention Credit”) which is a refundable tax credit against certain employment taxes. During the year ended December 31, 2020, the Company recorded $2,328 related to the CARES Employee Retention Credit within Special Items, net. In the three and nine months ended September 30, 2021, an additional $68 and $848, respectively, was recognized within Special Items, net. The $68 shown in the third quarter of 2021 relates to a true-up of the second quarter 2021 credit.

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Under the CARES Act Loan Program, the Company received a $45,000 loan (the “CARES Act Loan”) from the Treasury on October 26, 2020, which was repaid in full on March 24, 2021.

In accordance with any grants and/or loans received under the CARES Act, the Company is required to comply with the relevant provisions of the CARES Act and the related implementing agreements which, among other things, include the following: the requirement to use the Payroll Support Payments exclusively for the continuation of payment of crewmember and employee wages, salaries and benefits; the requirement that certain levels of commercial air service be maintained until March 1, 2021, or if ordered by the U.S. Department of Transportation ("DOT"), March 1, 2022; the prohibitions on share repurchases of listed securities and the payment of common stock (or equivalent) dividends until September 30, 2022; and restrictions on the payment of certain executive compensation until April 1, 2023.

4.

REVENUE

Sun Country is a certificated air carrier generating Operating Revenues from Scheduled service, Charter service, Ancillary, Cargo and Other revenue. Scheduled service revenue mainly consists of base fares. Charter service revenue is primarily generated through service provided to the U.S. Department of Defense, collegiate and professional sports teams and casinos. Ancillary revenues consist of revenue earned from air travel-related services such as baggage fees, seat selection fees and on-board sales. Cargo consists of revenue earned from flying cargo aircraft under the ATSA. Other revenue consists primarily of revenue from services in connection with Sun Country Vacations products.

The significant categories comprising Operating Revenues are as follows:

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Scheduled service

$

80,212

$

26,954

$

201,905

$

159,063

Charter service

 

33,809

 

23,264

 

88,511

 

60,983

Ancillary

 

33,697

 

12,254

 

86,626

 

52,253

Passenger

 

147,718

 

62,472

 

377,042

 

272,299

Cargo

 

24,400

 

14,272

 

68,084

 

17,491

Other

 

1,545

 

1,229

 

5,338

 

3,889

Total Operating Revenue

$

173,663

$

77,973

$

450,464

$

293,679

The Company attributes and measures its Operating Revenue by geographic region as defined by the DOT for airline reporting based upon the origin of each passenger and cargo flight segment.

The Company’s operations are highly concentrated in the U.S. but include service to many international locations, primarily based on scheduled service to Latin America during the winter season and on military charter services.

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Total Operating Revenues by geographic region are as follows:

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Domestic

$

167,660