Scheduled Leisure Will Suffer Amid Rising Labor And Regulatory Burdens

Key Takeaways

• Demographic shifts, labor shortages, and limited geographic reach threaten sustained growth and stability, while evolving travel patterns reduce potential high-margin business and charter demand growth.
  
• Stricter climate regulations and rising carbon costs risk eroding profitability, with low-cost carriers like Sun Country especially exposed to operating cost spikes and regional economic shocks.
  
• A diversified business model, strong operational performance, and long-term contracts position Sun Country for stable earnings, resilience, and potential margin expansion amid industry changes.

Catalysts

An air carrier company, operates scheduled passenger, air cargo, charter air transportation, and related services in the United States, Latin America, and internationally.

• Sun Country's heavy reliance on leisure-focused scheduled service and charter operations, combined with rising demographic headwinds such as aging populations and slowing growth in the U.S., may result in long-term stagnation or decline in passenger volumes, directly pressuring revenue and load factors even if short-term demand remains healthy.
  
• Intensifying climate change policies and the rising threat of increased carbon taxes could meaningfully raise Sun Country's operating costs over the next decade, particularly impacting net margins for low-cost carriers with less flexibility to absorb fuel and regulatory expense shocks.
  
• The airline's limited geographic diversification and concentration in secondary U.S. markets increase its vulnerability to regional economic slowdowns or adverse weather events, amplifying potential earnings volatility and undermining the stability expected from its current business mix.
  
• Ever-increasing labor costs, exacerbated by ongoing pilot and crew shortages, may steadily degrade Sun Country's cost advantage and erode earnings, especially as recent contractual wage increases are likely to be followed by further upward pressure in a tight labor market.
  
• Advancements in virtual communication technology and changing work habits threaten to permanently reduce demand for both business and group charter travel, shrinking potential growth segments and further constraining long-term top-line opportunities.

Sun Country Airlines Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sun Country Airlines Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sun Country Airlines Holdings's revenue will grow by 7.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.4% today to 13.5% in 3 years time.
• The bearish analysts expect earnings to reach $185.9 million (and earnings per share of $3.33) by about August 2028, up from $58.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.3x on those 2028 earnings, down from 9.7x today. This future PE is lower than the current PE for the US Airlines industry at 9.2x.
• Analysts expect the number of shares outstanding to grow by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.75%, as per the Simply Wall St company report.

Sun Country Airlines Holdings Future Earnings Per Share Growth

Risks

• The company's diversified business model-combining scheduled passenger, charter, and especially its rapidly growing cargo segment anchored by the Amazon Air contract-reduces reliance on any single revenue stream and enhances earnings resilience, which can support stable to growing net income and margins through future cycles.
  
• Sun Country is experiencing industry-leading profitability, with twelve consecutive quarters of profit, consistent margin expansion, and the best completion factor in the industry; operational efficiency and reliability trends can support stronger earnings and improved investor confidence.
  
• Long-term contracted revenue in both the Amazon cargo and charter segments (including annual contractual rate increases and high, stable block hour utilization) provide growing, predictable sources of income and support earnings stability even if scheduled passenger revenue faces temporary headwinds.
  
• Strategic flexibility supported by a strong balance sheet, disciplined capital allocation, and the ability to opportunistically pursue asset acquisitions or industry shake-up opportunities could enable Sun Country to increase scale, improve cost leverage, and drive margin expansion over time.
  
• Industry capacity reductions and competitor pullbacks in Sun Country's core markets, combined with a focused network in resilient regions like the Midwest, may support premium pricing, sustained high load factors, and ancillary revenue growth, which together could boost overall revenues and net profit going forward.

Valuation

• The assumed bearish price target for Sun Country Airlines Holdings is $11.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sun Country Airlines Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $185.9 million, and it would be trading on a PE ratio of 4.3x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $10.72, the bearish analyst price target of $11.0 is 2.5% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.