Amazon continues growing its network despite headwinds

The simplicity of air cargo garners appreciation from passenger airlines making a comparison. Boxes do not complain about the landing, as the saying goes. Sun Country’s Amazon cargo operations in the past have reported double-digit margins and results that few in aviation might comprehend: a 35% operating margin in Q3 2021, for example. Now, the cargo segment has turned upside down, posting losses of $71,000 in the third quarter of 2022 that the company describes as "breakeven." Cargo revenue for the first nine months of 2022 was $65.93 million or about 3% lower compared to the same period last year. Wages, on the other hand, have changed dramatically. Pilot wages are increasing 35%-45% under a new contract Sun Country entered into with its pilot union last year. In fact, wages comprise 61% of Sun Country’s cargo-operating expenses. Since the Amazon operation began in May 2020, Sun Country has reported quarterly revenue of $21 million to $24 million, representing about 20% of the airline’s total revenue. But comparing revenue with other operators, or even Sun Country’s passenger segment, does not tell the whole story. Some major cost items are a passthrough expense to Amazon, so the airline does not need to price the expenses into the contract. Revenue from Amazon is derived from several metrics, including a small, fixed fee for each of the twelve 737-800 converted freighters Sun Country operates for the e-commerce giant. The largest determinations are block hours and departures. There are also performance bonuses and penalties, as well as smaller Sun Country accounting measures, such as for initial payments. Sun Country operates 2.4-2.8 daily sectors per aircraft with daily utilization of approximately seven to eight hours. The average sector duration over the last twelve months was approximately three block hours. The first half of the year usually sees lower output than the second half, corresponding to the industrywide, fourth-quarter peak and Amazon Prime Day, which takes place in Q3. In addition, Amazon for the first time held a second Prime Day in October. Amazon provides aircraft and fuel for the operation, leaving Sun Country to manage staff costs. Wage costs per cargo block hour increased 20% in Q1 2022, 39% in Q2 and 45% in Q3. This includes wages of all cargo segment employee groups, including pilots. Sun Country has not replicated the 35%-45% pilot wage increase across other labor groups, so there could be additional factors driving total wage growth. Sun Country’s declining cargo performance is also due to maintenance costs, which increased 50% in Q3. It is unclear whether these costs were included in the original projections. Other operating costs jumped 55% in Q3 due to an increase in passenger departures, according to the carrier. Hawaiian Airlines In other news, management at Hawaiian Airlines announced its A330 partnership with Amazon in October, and repeatedly noted extensive forecasting while the carrier’s pilot union celebrated the deal and gave its full backing. Investors are upbeat about Hawaiian’s Amazon partnership, but they have not come down hard on Sun Country. They still view operating segments like cargo and charter as attractive since the customer pays for actual fuel costs, which makes for predictability and reduces cyclical performance. Since cargo has long billed customers with some element of actual fuel costs being recoverable, perhaps the Amazon partnerships highlight a broader opportunity for cargo to better sell its investor opportunity.

Amazon continues growing its network despite headwinds

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