Cargo revenue at Sun Country Airlines inched up in the second quarter despite reduced flight activity on behalf of Amazon, but is expected to jump one year from now when the retail giant supplies additional Boeing 737-800 freighters to the carrier.
The two companies in late June agreed on an expanded transportation services agreement under which Amazon (NASDAQ: AMZN) will deliver eight Boeing 737-800 converted cargo jets it controls through a long-term lease to support package deliveries in its domestic logistics network.
The planes will be pulled from current contractor Atlas Air, and transferred to Sun Country starting in March of 2025. The date range provided in Friday’s briefing with analysts was more specific than previous statements that the leisure airline would begin operating the initial aircraft in the first quarter, with the remainder of the planes delivered on a rolling basis by the third quarter.
Minneapolis-based Sun Country (NASDAQ: SNCY) on Thursday reported cargo revenue of $25 million, up 1.7% from the second quarter of 2023, primarily due to an annual rate escalation that went into effect in December. Cargo flight hours dipped 2.4% to accommodate scheduled heavy maintenance, but are expected to grow in the third and fourth quarters.
Sun Country has operated a dozen Amazon-supplied Boeing narrowbody cargo jets since 2020. The revised contract for crews, maintenance and insurance to operate the eight additional cargo jets was also extended through 2030 and gives Sun Country better rates, in addition to increasing its freighter fleet to 20 aircraft.
“Sun Country’s cargo segment will become a larger portion of our business starting in mid-2025. By 2026, we expect revenue from our cargo segment to be almost 20% of our total revenue, versus approximately 10% in 2024. The expansion of our cargo segment comes with almost no required capex and drives improved profitability and greater free cash flow,” said Chief Financial Officer Dave Davis on the earnings call.
Cargo’s share of operating revenue at large U.S. passenger carriers that don’t operate dedicated freighters is about 3% in a typical year.
Management stressed that the Amazon deal will further diversify Sun Country’s revenue base, placing less reliance on the volatile scheduled passenger and charter business to vacation destinations.
As previously announced, the airline will temporarily suspend service to some markets next year so pilots and other resources can focus on ramping up the Amazon cargo service.
Sun Country said overall revenue fell 2.6% to $254 million during the quarter. Sales were hurt by overcapacity across the domestic industry and by flight cancellations in late June. The company was able to lower unit costs by nearly 5% compared to the prior year. Net income dropped 91% to $1.8 million, the company’s eighth consecutive quarter of profitability.
Sun Country’s cargo revenue in 2023 increased 10.4% year over year to $100 million while most of the air cargo industry, including express air carriers, experienced downturns in aircraft utilization and revenue. The airline benefited from Amazon gaining share in a declining domestic parcel market, where it overtook FedEx and UPS last year in total deliveries. First-quarter cargo revenue at Sun Country increased 2.5%, to $24 million, from the same period a year ago.
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