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How Sun Country Airlines survived Tom Petters’ Ponzi scheme

Sun Country just unveiled plans to go public. But in 2008, after its owner was charged with running a multibillion-dollar fraud, it was on the verge of extinction.

Sun Country Airlines Boeing 737-800
Sun Country Airlines Boeing 737-800

Sun Country Airlines, which unveiled plans Monday to become a public company, came dangerously close to extinction in 2008 because its flamboyant owner Tom Petters had been running a Ponzi scheme.

After Petters’ business and home were raided by federal agents, Sun Country found itself in a precarious financial position because it was relying on Petters to subsidize an operating deficit.

I covered the Sun Country saga during a seven-year period in which I reported on the airline industry full time for the Star Tribune. It was an era marked by high oil prices, labor union disputes and airline mergers. But the federal fraud investigation that swirled around Petters was a new twist, even for an industry sector that regularly produced high drama.

In early October 2008, I wrote the following news story lead: “Sun Country Airlines, fighting to survive a cash crunch, has warned its employees to prepare for the possibility of major layoffs—or a shutdown of the airline—as early as Dec. 1.”

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In a letter to Sun Country’s 850 employees, John Fredericksen, serving as Sun Country’s general counsel, warned employees that the Mendota Heights-based airline was experiencing a “serious financial crisis.” He didn’t sugarcoat how dire the situation was for the struggling airline.

“Should Sun Country not be able to obtain additional financing or obtain relief from our major creditors in the near future, there is a distinct possibility that the airline will be shut down and/or you will be furloughed,” Fredericksen said in his letter to employees.

If there is a strong possibility that an airline will collapse, how many of its customers will keep booking flights?

Tom Petters
MinnPost file photo by Bill Kelley
Tom Petters
That wasn’t a business school question back in 2008. It was a tough reality for Sun Country.

Fortunately for the future of Sun Country, its leaders in 2008 recognized they needed to be candid with their customers. If they hoped to save the airline, they couldn’t play games.

I was hunkered down at my desk in the old Star Tribune newsroom at 425 Portland Avenue when I did a memorable phone interview with Sun Country’s CEO, Stan Gadek. He was joined by the airline’s chief spokeswoman, Wendy Williams Blackshaw.

“Tell me everything,” I said to them, referring to the risks of buying tickets on Sun Country. Because of Sun Country’s shaky financial standing, they explained that credit card companies would “holdback” 100 percent of the consumer payments for tickets on Sun Country. The credit card companies would not transfer that money to Sun Country—until after the flights occurred.

Fly or 100 percent refund

In a nutshell, a consumer would either fly to their destination on Sun Country or get a 100 percent “credit” from the credit card company if Sun Country went out of business.

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“It’s the consumers who will help determine whether Sun Country survives,” airline expert Terry Trippler told me at the time. “Would I buy a ticket from Sun Country for travel in October or November? Yes, I would, because that’s the hump they have to get over.”

Many consumers remained loyal to Sun Country and continued to buy tickets, but the airline still was in financial turmoil.

Not long after Petters was jailed, Sun Country’s leadership made a shrewd financial move that also separated the airline from the contagion of the Petters’ fraud case.

The airline filed for bankruptcy protection.

“Controlling their own destiny is better than being sucked into the vortex of all of the issues of the Petters organization” was the piercing commentary that attorney Ralph Strangis gave me in 2008. Strangis, who passed away in 2018, served on the United Airlines board and understood the challenges within the airline industry.

“We are doing everything in our power to make sure that we stay viable,” Williams Blackshaw said. She disclosed one of the major actions was a 50 percent pay deferral for the airline’s employees.

Without much warning, employees saw their paychecks cut in half because it was one way of coping with Sun Country’s cash shortage.

However, CEO Gadek increased employee compensation to 70 percent of prior wages only nine days after Sun Country filed for bankruptcy. “Based upon continued customer support for our business in the form of new bookings, I am comfortable taking this action,” Gadek said.

Sun Country still needed to get some cash to pay its bills, and it arranged one of the most unusual loans in aviation history.

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Before federal agents raided Petters Group Worldwide in Minnetonka on Sept. 24, 2008, Sun Country had been counting on Tom Petters to provide it with a loan to tide the airline over until revenues spiked during the winter flying season.

With Petters behind bars and Sun Country in a terrible financial predicament, it wasn’t exactly a great candidate for conventional lending. So Sun Country came up with a creative financing proposal.

Peculiar loan

U.S. Bankruptcy Judge Robert Kressel gave Sun Country approval to borrow money from a Petters Aviation subsidiary called Elite Landings. It was a Petters business used to market Airbus corporate jets. Elite Landings actually had some cash, because it had received a $9.5 million refund from Airbus after some aircraft orders were canceled.

Local attorney Jim Rubenstein was representing Elite Landings, and he told the judge he failed to find any case law with a similar circumstance. It was a novel deal, because one bankrupt business would be lending money to another bankrupt business owned by the same person.

Attorneys for Sun Country, Elite Landings and the Sun Country Creditors Committee all supported the unique arrangement. So did Doug Kelley, the court-appointed receiver of the Petters assets. Kressel sided with the deal’s advocates, despite objections from the Petters Aviation Creditors Committee.

2008 was a rough rollercoaster ride for Gadek. He became Sun Country’s CEO in March 2008, and then dealt with the Petters Ponzi scandal, Sun Country’s financial crisis, bankruptcy and turnaround plans.

By December, after Judge Kressel greenlighted the operating loan, Gadek saw that Sun Country could withstand its financial crisis that was a fallout from Petters’ arrest. “The dramatic reduction in fuel prices has also significantly improved our financial outlook,” he said. In July, oil reached $147 a barrel and Sun Country didn’t have any fuel hedges in place to protect it from that price volatility. But by the end of 2008, oil had dropped below $50 a barrel.

Gadek said that the new financing Sun Country secured “should remove any doubt that people may have about our viability going forward.”

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The actions that Gadek and other leaders took, coupled with the sacrifices of the airline’s employees and support of its customers, saved Sun Country in 2008.

The Minnesota-based carrier didn’t become one of the many defunct airlines on the ash heap of history. Now its current CEO, Jude Bricker, wants to lead Sun Country into aviation’s big leagues.