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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 June 30, 2021

Or

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

Commission File Number 001-40217

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 June 30, 2021:

Common Stock, $0.01 par value – 57,158,467 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

17

8

Fuel Derivatives and Risk Management

19

9

Fair Value Measurements

20

10

Income Taxes

21

11

Special Items, net

22

12

Commitments and Contingencies

23

13

Operating Segments

23

14

Subsequent Events

24

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

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

55

Item 4. Controls and Procedures

55

Part II. Other Information

Item 1. Legal Proceedings

56

Item 1A. Risk Factors

56

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

56

Item 3. Defaults Upon Senior Securities

57

Item 4. Mine Safety Disclosures

57

Item 5. Other Information

57

Item 6. Exhibits

58

Signatures

59

- 2 -

Table of Contents

PART I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

June 30, 2021

    

December 31, 2020

(Unaudited)

ASSETS

  

  

Current Assets:

 

  

 

  

Cash and Equivalents

$

310,723

$

62,028

Restricted Cash

 

4,762

 

8,335

Investments

 

6,076

 

5,624

Accounts Receivable, net of an allowance for credit losses of $297 and $224, respectively

 

25,989

 

28,690

Short-term Lessor Maintenance Deposits

 

1,490

 

3,101

Inventory, net of a reserve for obsolescence of $1,188 and $996, respectively

 

5,382

 

5,407

Prepaid Expenses

 

14,447

 

8,002

Derivative Assets

 

1,598

 

Other Current Assets

 

779

 

5,553

Total Current Assets

 

371,246

 

126,740

Property & Equipment, net:

 

  

 

  

Aircraft and Flight Equipment

 

395,646

 

331,685

Leasehold Improvements and Ground Equipment

 

14,025

 

13,526

Computer Hardware and Software

 

8,331

 

7,845

Finance Lease Assets

 

161,649

 

117,833

Rotable Parts

 

9,094

 

8,691

Property & Equipment

 

588,745

 

479,580

Accumulated Depreciation & Amortization

 

(88,704)

 

(65,065)

Total Property & Equipment, net

 

500,041

 

414,515

Other Assets:

 

  

 

  

Goodwill

 

222,223

 

222,223

Other Intangible Assets, net

 

91,110

 

93,110

Operating Lease Right-of-use Assets

 

70,715

 

121,269

Aircraft Lease Deposits

 

7,657

 

10,253

Long-term Lessor Maintenance Deposits

 

19,493

 

22,584

Deferred Tax Asset

 

21,342

 

36,216

Other Assets

 

6,137

 

6,357

Total Other Assets

 

438,677

 

512,012

Total Assets

$

1,309,964

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

June 30, 2021

    

December 31, 2020

(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

 

  

 

  

Accounts Payable

$

36,847

$

34,035

Accrued Salaries, Wages, and Benefits

 

17,855

 

16,368

Accrued Transportation Taxes

 

12,907

 

5,883

Air Traffic Liabilities

 

113,771

 

101,075

Derivative Liabilities

 

 

1,174

Over-market Liabilities

 

4,309

 

9,281

Finance Lease Obligations

 

9,601

 

11,460

Loyalty Program Liabilities

 

12,337

 

7,016

Operating Lease Obligations

 

18,239

 

34,492

Current Maturities of Long-term Debt

 

19,795

 

26,118

Other Current Liabilities

 

5,145

 

6,841

Total Current Liabilities

 

250,806

 

253,743

Long-term Liabilities:

 

  

 

  

Over-market Liabilities

 

12,583

 

28,128

Finance Lease Obligations

 

135,091

 

95,710

Loyalty Program Liabilities

 

8,540

 

15,053

Operating Lease Obligations

 

68,408

 

112,707

Long-term Debt

 

267,684

 

256,345

Income Tax Receivable Agreement Liability

 

96,500

 

Other Long-term Liabilities

 

6,119

 

7,764

Total Long-term Liabilities

 

594,925

 

515,707

Total Liabilities

 

845,731

 

769,450

Commitments and Contingencies

 

  

 

  

Stockholders' Equity:

 

  

 

  

Common Stock

 

572

 

468

Common stock with $0.01 par value, 995,000,000 shares authorized, 57,158,467 and 46,839,659 issued at June 30, 2021 and December 31, 2020, respectively.

 

  

 

  

Loans to Stockholders

 

 

(3,500)

Additional Paid In Capital

 

476,368

 

248,525

Retained Earnings (Deficit)

 

(12,707)

 

38,324

Total Stockholders' Equity

 

464,233

 

283,817

Total Liabilities and Stockholders' Equity

$

1,309,964

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

    

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Operating Revenues:

 

  

 

  

  

 

  

Passenger

$

125,130

$

31,341

$

229,325

$

209,827

Cargo

 

22,098

 

3,219

43,684

 

3,219

Other

 

1,961

 

816

3,793

 

2,660

Total Operating Revenue

 

149,189

 

35,376

276,802

 

215,706

Operating Expenses:

 

  

 

  

 

  

 

  

Aircraft Fuel

 

29,709

 

677

 

53,984

 

56,238

Salaries, Wages, and Benefits

 

42,316

 

32,484

 

86,392

 

70,575

Aircraft Rent

 

3,815

 

5,934

 

9,414

 

16,966

Maintenance

 

11,300

 

2,426

 

20,510

 

8,904

Sales and Marketing

 

5,822

 

1,630

 

10,932

 

10,202

Depreciation and Amortization

 

13,460

 

12,175

 

26,075

 

22,702

Ground Handling

 

6,551

 

1,614

 

11,781

 

10,906

Landing Fees and Airport Rent

 

8,752

 

2,667

 

17,537

 

13,781

Special Items, net

 

(38,520)

 

(31,481)

 

(65,392)

 

(31,481)

Other Operating, net

 

16,746

 

9,484

 

31,397

 

23,917

Total Operating Expenses

 

99,951

 

37,610

 

202,630

 

202,710

Operating Income (Loss)

 

49,238

 

(2,234)

 

74,172

 

12,996

Non-operating Income (Expense):

 

  

 

  

 

  

 

  

Interest Income

 

9

 

63

 

24

 

314

Interest Expense

 

(6,080)

 

(5,442)

 

(13,201)

 

(11,058)

Other, net

 

18,054

 

(325)

 

18,049

 

(494)

Total Non-operating Income (Expense), net

 

11,983

 

(5,704)

 

4,872

 

(11,238)

Income (Loss) before Income Tax

 

61,221

 

(7,938)

 

79,044

 

1,758

Income Tax Expense (Benefit)

 

9,468

 

(1,898)

 

14,875

 

547

Net Income (Loss)

$

51,753

$

(6,040)

$

64,169

$

1,211

Net Income (Loss) per share to common stockholders:

 

  

 

  

 

  

 

  

Basic

$

0.91

$

(0.13)

$

1.21

$

0.03

Diluted

$

0.83

$

(0.13)

$

1.12

$

0.02

Shares used for computation:

 

  

 

  

 

  

 

  

Basic

 

57,156,159

 

46,805,950

 

52,850,041

 

46,805,950

Diluted

 

61,982,441

 

46,805,950

 

57,403,593

 

48,243,146

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Six Months Ended June 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

Six Months Ended June 30, 2021

Retained

    

Common Stock

Loans to

    

Additional

    

Earnings

Warrants

    

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

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)

    

Six Months Ended June 30, 

    

2021

    

2020

Net Income

$

64,169

$

1,211

Adjustments to reconcile Net Income to Cash from Operating Activities:

 

  

 

  

Depreciation and Amortization

 

26,075

 

22,702

Tax Receivable Agreement Adjustment

(18,700)

Reduction in Operating Lease Right-of-use Assets

 

9,419

 

13,585

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

 

(12,668)

 

381

Unrealized (Gain) Loss on Fuel Derivatives

 

(3,599)

 

16,056

Amortization of Over-market Liabilities

 

(3,081)

 

(5,781)

Deferred Income Taxes

 

14,875

 

570

Amazon Warrants Vested

 

2,800

 

Stock-based Compensation Expense

 

3,613

 

757

Amortization of Debt Issuance Costs

 

1,911

 

903

Changes in Operating Assets and Liabilities:

 

  

 

  

Accounts Receivable

 

4,265

 

3,406

Inventory

 

(224)

 

(596)

Prepaid Expenses

 

(6,446)

 

(797)

Lessor Maintenance Deposits

 

(3,220)

 

(6,946)

Aircraft Lease Deposits

 

1,496

 

1,290

Other Assets

 

1,294

 

(3,033)

Accounts Payable

 

3,546

 

(13,144)

Accrued Transportation Taxes

 

7,024

 

(11,779)

Air Traffic Liabilities

 

12,695

 

(20,587)

Loyalty Program Liabilities

 

(1,192)

 

(775)

Reduction in Operating Lease Obligations

 

(15,826)

 

(9,718)

Other Liabilities

 

1,615

 

(600)

Net Cash Provided by (Used in) Operating Activities

 

89,841

 

(12,895)

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property & Equipment

 

(66,736)

 

(93,677)

Purchase of Investments

 

(1,436)

 

(190)

Proceeds from the Sale of Investments

 

984

 

227

Net Cash Used in Investing Activities

 

(67,188)

 

(93,640)

Cash Flows from Financing Activities:

 

  

 

  

Cash Received from Stock Offering

 

235,894

 

Costs of Stock Offering

 

(8,669)

 

Proceeds from Stock Option and Warrant Exercises

 

26

 

21

Proceeds from Borrowings

 

80,500

 

220,307

Repayment of Finance Lease Obligations

 

(7,864)

 

(85,976)

Repayment of Borrowings

 

(74,709)

 

(54,879)

Debt Issuance Costs

 

(2,709)

 

(2,764)

Net Cash Provided by Financing Activities

 

222,469

 

76,709

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

 

245,122

 

(29,826)

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

 

70,363

 

64,478

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

$

315,485

$

34,652

Supplemental information:

 

  

 

  

Cash Payments for Interest

$

11,040

$

10,115

Cash Payments (Receipts) for Income Taxes, net

$

40

$

(22)

Non-cash transactions:

 

  

 

  

Lease Deposits Applied Against the Purchase of Aircraft

$

3,296

$

Aircraft and Flight Equipment Acquired through Finance Leases

$

42,911

$

Purchases of Property & Equipment in Accounts Payable

$

$

555

Costs of Stock Offering in Accounts Payable

$

38

$

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

June 30, 2021

June 30, 2020

Cash and Equivalents

$

310,723

$

32,084

Restricted Cash

 

4,762

 

2,568

Total Cash, Cash Equivalents and Restricted Cash

$

315,485

$

34,652

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.

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 six months ended June 30, 2021, 189,652 and 379,304 warrants vested, respectively. The cumulative warrants vested as of June 30, 2021 were 1,264,356. No warrants vested during the six months ended June 30, 2020.

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 six months ended June 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 reclassifying those dollars to Additional Paid-In Capital. These reclasses were $238,694 as of December 31, 2020, June 30, 2020 and March 31, 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

- 9 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

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 six months ended June 30, 2021 are not necessarily indicative of operating results for future quarters or for the year ended 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 US according to the Centers for Disease Control and Prevention (“the CDC”).  The initial beneficiaries of the travel rebound are expected to be leisure and VFR focused Low-Cost Carriers (“LCCs”) and Ultra Low-Cost Carriers (“ULCCs”), while the more international and business travel exposed legacy network airlines are expected to lag behind.  

As COVID-19 has spread globally, many countries have imposed strict international travel restrictions. The U.S. market has recovered markedly 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.

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

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 such as consumers being unable or unwilling to visit brick-and-mortar stores due to social distancing, which translated into an acceleration of secular growth in e-commerce. 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 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 quarter of 2021, the Company received $32,208 from the Treasury under the Payroll Support Program Extension (“PSP2”). During the second quarter of 2021, the Company received an additional $4,831 from the Treasury as a top-off grant under PSP2.

Further, in the second quarter, the Company received a grant of $34,547 under the American Rescue Plan Act of 2021 (“PSP3”) which was enacted on March 11, 2021, and authorizes Treasury to provide additional assistance to passenger air carriers and contractors that received financial assistance under the CARES Act. The grant amount recognized under PSP3 of $34,547 was recorded in Special Items, net during the second quarter.

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 first and second quarters of 2021, an additional $334 and $446, respectively, was recognized within Special Items, net.

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 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.

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

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 Vacation products.

The significant categories comprising Operating Revenues are as follows:

    

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Scheduled service

$

67,073

$

17,882

$

121,693

$

132,110

Charter service

 

28,898

 

8,491

 

54,703

 

37,718

Ancillary

 

29,159

 

4,968

 

52,929

 

39,999

Passenger

 

125,130

 

31,341

 

229,325

 

209,827

Cargo

 

22,098

 

3,219

 

43,684

 

3,219

Other

 

1,961

 

816

 

3,793

 

2,660

Total Operating Revenue

$

149,189

$

35,376

$

276,802

$

215,706

The Company attributes and measures its Operating Revenue by geographic region as defined by the Department of Transportation 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.

Total Operating Revenue by geographic region are as follows:

    

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Domestic

$

142,774

 

$

34,307

$

262,020

 

$

197,345

Latin America

 

6,266

 

1,038

 

14,228

 

18,114

Other

 

149

 

31

 

554

 

247

Total Operating Revenue

$

149,189

 

$

35,376

$

276,802

 

$

215,706

Contract Balances

The Company’s contract assets primarily relate to costs incurred to get the 12 Amazon cargo aircraft ready for service. The balances are included in Other Current Assets and Other Assets on the Condensed Consolidated Balance Sheets. The amount expensed during the three and six months ended June 30, 2021 was $169 and $307, respectively, and is included in Maintenance expense. There was nothing expensed in the six months ended June 30, 2020, since the Amazon cargo services were just getting started.

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company’s significant contract liabilities are comprised of 1) ticket sales for transportation that has not yet been provided (reported as Air Traffic Liabilities on the Condensed Consolidated Balance Sheets), 2) outstanding loyalty points that may be redeemed for future travel and other non-air travel awards (reported as Loyalty Program Liabilities on the Condensed Consolidated Balance Sheets) and 3) the Amazon Deferred Up-front Payment received (reported within Other Liabilities on the Condensed Consolidated Balance Sheets).

Contract Assets and Liabilities are as follows:

    

June 30, 2021

    

December 31, 2020

Contract Assets

  

  

Costs to fulfill contract with Amazon

$

3,203

$

3,614

Air Traffic Liabilities

$

113,771

$

101,075

Loyalty Program Liabilities

 

20,877

 

22,069

Amazon Deferred Up-front Payment

 

4,772

 

5,240

Total Contract Liabilities

$

139,420

$

128,384

The balance in the Air Traffic Liabilities fluctuates with seasonal travel patterns. Most tickets can be purchased no more than twelve months in advance, therefore any revenue associated with tickets sold for future travel will be recognized within that timeframe. For the six month period ended June 30, 2021, $82,206 of revenue was recognized in Passenger revenue that was included in the Air Traffic Liabilities as of December 31, 2020.

As part of the ATSA executed in December 2019, Amazon paid the Company $10,300 toward start-up costs. Upon signing the ATSA, Amazon received 632,183 fully vested warrants to purchase the Company’s common stock, with a fair value of $4,667. This fair value was assigned to a portion of the $10,300 cash received from Amazon and the remaining $5,633 was recorded in Other Liabilities on the Company's Condensed Consolidated Balance Sheet. This deferred up-front payment is being amortized into revenue on a pro-rata basis over the initial six years of the ATSA. For the three and six months ended June 30, 2021, $237 and $468 was amortized into Cargo revenue, respectively. For each of the three and six months ended June 30, 2020, $38 was amortized into Cargo revenue.

Loyalty Program

The Sun Country Rewards program provides loyalty awards to program members based on accumulated loyalty points. Loyalty points are earned as a result of travel and purchases using the Company’s co- branded credit card. The balance of the Loyalty Program Liabilities fluctuates based on seasonal patterns, which impact the volume of loyalty points awarded through travel or issued to co-branded credit card and other partners (deferral of revenue) and loyalty points redeemed (recognition of revenue).

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Changes in the Loyalty Program Liabilities are as follows:

    

2021

    

2020

Balance - January 1

$

22,069

$

22,892

Loyalty Points Earned

 

1,904

 

2,621

Loyalty Points Redeemed(1)

 

(3,096)

 

(3,395)

Balance - June 30

$

20,877

$

22,118

(1)Principally relates to revenue recognized from the redemption of loyalty points for both air and non-air travel awards. Loyalty points are combined in one homogenous pool and are not separately identifiable. As such, the revenue recognized is comprised of points that were part of the Loyalty Program Liabilities balance at the beginning of the period, as well as points that were earned during the period.

The timing of loyalty point redemptions can vary significantly, however most new points, that are not left to expire, are redeemed within two years. Given the inherent uncertainty of the current operating environment due to COVID-19, the Company will continue to monitor redemption patterns and will adjust estimates in the future, which could be material.

5.

EARNINGS PER SHARE

Basic earnings per share, which excludes dilution, is computed by dividing Net Income available to common stockholders by the weighted average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The number of incremental shares from the assumed issuance of shares relating to share based awards is calculated by applying the treasury stock method.

The following table shows the computation of basic and diluted earnings per share: