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After 15 years of turbulence, Sun Country finding clear air

The story the airline tells is a sweet one — of a plucky carrier that just wouldn’t quit.

If you had asked an airline executive in the year 2000 to list the carriers that would survive two recessions, 9/11 and a wave of industry consolidation that has left the industry in the hands of four mega-carriers, Sun Country Airlines would not have been on that list.

Continental is gone, Northwest is gone, AirTran disappears next month and US Airways next year. Charter carriers like ATA, Evergreen and World are defunct. Regional niche lines born of deregulation, such as Morris Air and Midway, are long merged into bigger carriers.

Yet Mendota Heights-based Sun Country remains, more than 30 years and multiple incarnations later — in the wake of two bankruptcies, various strategies and ownership that’s run the gamut of disparate backgrounds — still providing an alternative to flyers unlike any other airline in the United States.

“People in Minneapolis-St. Paul should be appreciative they still have this airline,” says Joe Leonard, Edina resident, Air Canada director and CEO of AirTran from 1999 to 2008. “It’s about the only one of its type left.”

Which raises questions — “not just how Sun Country still exists,” says longtime aviation journalist and business traveler advocate Joe Brancatelli, “but why?”

The story the airline tells is a sweet one — of a plucky carrier that just wouldn’t quit. “You’ve got a phenomenally loyal, dedicated group of employees,” says travel industry analyst Henry Harteveldt of Atmosphere Research, “and tenacious, dedicated management.”

Twin Cities BusinessBut the more revealing version is that Sun Country survived, and thrives, because when it needed to, it has been able to fly under the radar to stay alive.

Too small to matter

Sun Country’s harrowing life story (see “12 Pilots And Two Flight Attendants”) belies a widely misunderstood idea about the airline. Throughout its tenure, local newspapers and business publications speculated on when the airline would be snapped up by a larger carrier. But it never happened.

“No one needed to go through Sun Country to get what they wanted,” says Minneapolis attorney Jay Salmen, who served as president or CEO of the airline from 2001 to 2006 and again from 2007 to 2008. “Sun Country could never give another airline something it couldn’t create on its own. It doesn’t own its planes. It doesn’t own its gates.” Nor does SY (the two-letter designation assigned by the International Air Transport Association, and the airline’s industry moniker) control many valuable takeoff and landing slots at restricted airports on the East Coast.

“There are enormous synergies in merging big carriers,” says former CEO David Banmiller, who ran the airline from 2000 to 2002. “But there were never synergies for buying Sun Country.”

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Put more simply, and perhaps painfully: “They were too small to matter,” says Harteveldt, “but that may have been their saving grace.”

That very quality is central to Sun Country’s strategy going forward. “We don’t offer a survival threat to a large airline,” explains CEO John Fredericksen, who joined the airline a decade ago as its general counsel.

Left at the altar in the merger mania, Sun Country — based in a crowded office space in an unassuming Mendota Heights office park — is now reaping the benefits of what others have sowed.

“The predominant focus of the major carriers is constraining capacity,” says Leonard. They’ve done it largely through mergers.

“In general, [industry] consolidation has been helpful to us,” Fredericksen notes. “There are not as many seats in the marketplace. There is more pricing rationality.”

And there’s the drip-drip-drip of ancillary fees. Baggage fees, change fees, seat assignment fees. “Airlines produce a lot of cash flow,” says Harteveldt, “and all the fees are allowing superior margins.”

Sun Country charges fees, but at about half the going rate of the major carriers. “Our business model,” says Fredericksen, “is not to extract every nickel we can from you.”

How Sun Country competes

Sun Country is trying to walk a fine line as a hybrid carrier. It’s not a major network carrier like Delta, nor a low-cost carrier like Spirit, nor a hip customer-service innovator like JetBlue.

“We don’t want to be the cheapest airline,” says Fredericksen. “We want to be the best value and offer more of a civilized experience.”

That’s been Sun Country’s mission throughout its history, but the airline has lost far more money than it’s ever earned. But management thinks—through years of painful trial and error—that it’s finally gotten the strategy right:

Focus on the leisure market: SY has come to terms with the fact that it is not positioned to serve most business travelers, even though they are the most lucrative airline customers. “Competing for business travelers requires an extensive route network and frequencies,” says Harteveldt.

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Which leads to another problem. “Corporate travel departments get rebates from Delta based on volume of travel,” explains Salmen. “Sun Country can’t match that volume, so flying them just inflates your company’s travel expense.”

So Sun Country concentrates on leisure, a market with risk. “Our research shows the typical leisure traveler earns $73,000 a year,” says Harteveldt. “It’s one of the ultimate discretionary purchases and this customer is extremely price sensitive.”

Control costs: As a niche carrier serving a price-sensitive audience, Sun Country must keep its operating costs below that of the major airlines. “At AirTran we looked at cost every day,” says Leonard. “We wanted to reduce our unit costs 1 to 2 percent each year. If costs drift up, you lose your major competitive advantage.” Currently Sun Country has a cost advantage over the large network carriers but not other niche carriers, and it carries a cost disadvantage compared with ultra-low-cost airline Spirit (see chart, right).

An airline’s primary driver of expense today is fuel, a cost the business has no control over. “The price of oil changes by $1 and your pro formas change a lot,” says Tom Petters’ estate trustee Doug Kelley, who was charged with selling the airline out of its second bankruptcy. “Oil was volatile when we had the airline, and I remember [prospective buyers] the Davises telling me they were comfortable with volatile commodities because they were in the dairy business.”

Stay under the radar: The lesson of the airline’s dark years is to stay out of the major carriers’ honeypots, because they are able to lose money at a hub or route to chase competition away. That said, Delta does not compete as aggressively with SY as Northwest did and often seems to ignore Sun Country’s pricing and sales.

“Delta and Sun Country are competing for a different customer base,” says Harteveldt. “Delta is a much more diverse organization than Northwest was. It doesn’t want to be cast as the bad guy. It has more aircraft in maintenance hangars than Sun Country has in its fleet.”

Sun Country treads cautiously. When it recently added service to Chicago, it did not take on the majors at O’Hare (as Spirit did), but instead chose Midway. Unable to attract much business travel, it clumped its flights around weekends.

“We jumped into Chicago knowing it was the most competitive air market from MSP,” says Fredericksen. “Bracketing weekends has worked for us.”

Fly the troops: Sun Country did $66 million in charter revenue in 2012, the most since 1999. The charter niche today, though, is not vacation bundling; it is shuttling troops for the military.

“Twenty-five percent of our revenue is charter flying,” says Fredericksen. “And we’re bullish on the future of that. It’s ripe to be developed, and there’s limited competition.” SY also flies college sports teams and casino groups. Charter customers pay for the cost of labor and fuel, so the airline’s profit is baked in, not subject to the vagaries of fuel spikes or weak bookings. Still, there are downsides.

“The military market is a great market when it’s working,” says Banmiller. “But you need a war or conflict.”

Build loyalty: Sun Country revamped its frequent flyer plan not long ago and just this year introduced a branded credit card. The frequency plan’s point of differentiation is that members can pool points. The credit card allows customers to earn points through any spending.

The credit card “helps bond the consumer to an airline,” explains Harteveldt, while also creating “incremental revenue when the airline sells miles to the bank” to distribute to its credit card holders.

Exploit the hometown advantage: Sun Country’s radio ads emphasize, “You go with Minnesotans, you come home with Minnesotans.” It may be a rather provincial marketing tactic, but it’s an acknowledgement that SY’s passenger business rises and falls at MSP.

“Marketing in New York and L.A., you get lost,” explains Fredericksen. “We find it’s much more productive to spend our dollars and efforts here at home.”

In a market where Northwest Airlines never was considered a customer service innovator, Sun Country has long traded on its neighborly vibe. “We have a core employee group,” says Fredericksen, “with an awful lot of 20-year veterans. They know our secret is treating people well. Our flight attendants are the best, as are our gate agents.

“Our owners have exerted their family’s values,” he continues. “Everything revolves around the customer.”

And there’s always the weather: “It’s a unique market,” says Leonard, “because there’s this intense need to leave in winter.”

Turbulence ahead?

Sun Country faces two major short-term challenges at MSP. One is the emergence of the ultra-low-cost carriers. Spirit has become an aggressive competitor at major hub airports, including MSP. Its quick growth has filled up Terminal 2 and necessitated Spirit’s relocation to Terminal 1 next January.

The ultra-low-cost carriers (Frontier Airlines is in the process of converting to one, say industry observers) offer fares often less than $50 one way, but they charge fees for everything from using their website to issuing a boarding pass, carrying on a bag or getting assistance at the airport. For frugal, self-reliant travelers (and last-minute business travelers), the savings are real. And Spirit has an operating cost advantage over SY.

“They have grown the market with pricing strategies,” says Fredericksen. “We compete in many core winter markets.”

“Spirit’s customer is our customer base,” says Jake Yockers, a Sun Country pilot since 1990 and spokesman for the airline’s unit of the Air Line Pilots Association.

Sun Country reported a $4 million operating loss for the period 3Q13 to 2Q14, compared to a $17 million profit in the period a year prior. It saw revenues rise nearly 8 percent, but operating costs jumped 13.6 percent.

The chart below make manifest that Sun Country’s greatest overhead advantage is sub-industry-standard wages.

Jay Salmen attributes some of the labor cost disparity to using pilot hours more efficiently than other carriers do, as well as a relative lack of overnight layovers.

Still, it’s undeniable that Sun Country crews also work for lower wages than at other carriers. “The employees have made significant sacrifices time and time again to keep Sun Country flying,” says an industry executive familiar with the airline. “Sun Country would not exist if not for them.” The question is for how long the carrier’s union workforce will remain so accommodating.

Yockers says SY pilot wages have been stagnant since 1990. Flight attendant wages are “well below industry standard,” says Joe Battaglia, business agent for Teamsters Local 120, which represents Sun Country’s 350 flight attendants. Both unions are in federal mediation, but both say they see signs of progress and hope to have new contracts negotiated before year’s end.

CEO John Fredericksen declined to comment on the company’s labor situation.

“The employees have always been here for Sun Country,” says Yockers. “Most employees don’t like their airline. We do.”

To grow or no?

The unanswered question: What is ownership’s strategy for Sun Country? The airline is adding two aircraft late this year and will secure one of the vacated Spirit gates at Terminal 2 by winter.

“I’ve been in fairly aggressive discussions with the Metropolitan Airports Commissioners to expand Terminal 2. I’m seeing some progress on that,” says Fredericksen. “The terminal is full. We’re incurring delays on flights and it’s affecting our growth strategies.”

Asked about those strategies, however, Fredericksen turns vague.

“I don’t get a sense of a long-range strategy,” says Yockers. “There’s no capital investment. They seem to be doing this all on cash flow.”

In July, chairman Marty Davis told the Star Tribune, “We’re comfortable with the size the airline is now.”

Fredericksen confirms that “our growth plan is incremental” and that the airline is not seeking a capital infusion. Though he can’t explain why his owners bought Sun Country or what their long-term plans are for it, he says, “They’re the kind of people who invest for the long term. They’re not in this to flip the company, I know that.”

And although the employee base would like to see Sun Country grow, industry insiders are skeptical.

“They’ve got the right airplane [the 737], they’ve got a good cost structure, a cooperative labor environment and a general decline in nonstop service from their primary competitor [Delta],” says ex-CEO Banmiller. “They don’t need to grow; they need to keep doing what they’re doing.”

In essence, keep flying under the radar. “It’s a niche carrier. As long as it remains a niche carrier, it’ll do fine,” says Leonard. “If it wants to grow larger, Delta and others will have their say.”

Ultimately, commercial aviation is a volatile business, one in which Salmen recommends owners and execs tread cautiously. “I don’t think the airline business over the long haul is a good business. You have both high cost of capital and expensive labor, which usually doesn’t work.

“In the end,” Salmen concludes, “Sun Country owns very few assets. So really they are only as good as their last quarter.”

This article is reprinted in partnership with Twin Cities Business.