The Tom Petters fraud case

Sept. 28: Sun Country won't ask for more cash from Petters

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: September 28, 2008 - 8:39 PM

The airline's CEO says it will continue its normal flight schedule and won't be affected by its owner's legal woes.

Sun Country Airlines management is taking steps to separate itself from its board chairman, Tom Petters, the target of a major federal fraud investigation.

Regardless of that probe's outcome, the airline will keep flying, its chief executive said in a weekend interview.

"My goal is to become financially independent and not seek any additional cash from Petters Group Worldwide for the rest of this year," Sun Country CEO Stan Gadek said. "I'm confident that Sun Country will be able to achieve that goal."

On Wednesday, federal agents raided Petters Group Worldwide headquarters in Minnetonka and Tom Petters' home in Wayzata to collect evidence for a potential fraud prosecution. They outlined their theory of the fraud scheme in a search warrant unsealed Friday.

Federal investigators are looking at the actions of Petters in connection with Petters Company Inc., a financing operation.

Sun Country's headquarters in Mendota Heights has not been raided, and its executives have not been targets of an FBI inquiry.

But Petters is linked with Sun Country because his Petters Aviation subsidiary owns all of the voting shares of the airline and Petters serves as the airline's board chairman.

Gadek said Petters provided about $25 million to subsidize Sun Country's operating losses over the past year. But Gadek was adamant in a Saturday interview that Sun Country can survive this year without any further aid from Petters.

"I will do whatever it takes to ensure the viability of this company and the jobs for our employees and being able to fly for our customers," Gadek said.

Since Gadek joined Sun Country in March, he has led a financial turnaround at the carrier. The airline made money in July and August.

He expects it to record a small loss for the third quarter.

But, he said, the loss will be significantly smaller than the $7.7 million that Sun Country lost in the third quarter of 2007, even though fuel prices are much higher this year.

Gadek has eliminated some unprofitable routes and developed new sources of revenue through military charter flying and additional passenger fees. Sun Country also secured the contract to fly charter flights for Democratic vice presidential candidate Joseph Biden.

In addition, Gadek has taken a pay cut and Sun Country's unions agreed to take cuts.

Still selling tickets

George Wozniak, Hobbit Travel president and CEO, said in an interview Sunday that all of the media attention about the investigation of Petters has made people wonder about Sun Country's future.

But Wozniak said that he has talked to Gadek about the company's finances and "he assured me that Sun Country has a plan in place and the ability to continue flying without the [financial] help of the Petters organization."

Wozniak owns some nonvoting shares in Sun Country. He also does substantial business with Sun Country by buying up entire charter flights as well as blocs of charter seats on scheduled service flights.

"All the risk is on us," Wozniak said, because he pays Sun Country its actual fuel costs for the charter flights. Wozniak has purchased seats on Sun Country flights through April and is marketing those seats to leisure travelers.

"It is important that Sun Country gives consumers the confidence that they can be a standalone airline and that they will operate the flights that they have in the schedule," Wozniak said.

Sun Country's flight operations have not been altered by the news of the Petters' investigation, but Gadek said he wants customers to know "that they can purchase tickets on Sun Country and we're going to fly."

Sun Country lost $47 million on $251 million in operating revenue for the 12 months ending in June. It had a slim $2.3 million as a cash cushion at the end of June.

But Gadek said that the cash balance is only part of Sun Country's financial picture, because that figure doesn't reflect about $25 million in advance ticket purchases. After customers buy tickets on Sun Country, the credit card companies hold the consumers' payments and don't pass them along to the airline until after the flights occur.

"The customer is protected," Gadek said, because Sun Country doesn't get the customer's money until after the customer flies on Sun Country.

He estimated that Sun Country will have a small loss in the fourth quarter and be profitable in the first quarter of next year, which encompasses its heavy winter flying schedule to warm weather destinations.

The months of October and November have lower passenger demand for Sun Country, which means lower revenue. So Gadek said that he will be negotiating with vendors to reschedule payments to get through this period.

Because Sun Country's revenue and expense gap has been narrowing in recent months, Gadek said Petters has not provided any operating subsidies to the airline for the past four months.

The Sun Country board meets quarterly, and Gadek said that Petters has not been in the airline's headquarters building since June.

An appeal to MAC?

This summer, Gadek appeared before the finance committee of the Metropolitan Airports Commission, because Sun Country was seeking some form of financial aid to help it cope with high oil prices.

Since that August meeting, Sun Country has not made a specific proposal to the MAC.

"Fuel is still too high," Gadek said Sunday, which is why he would still like to secure some type of help from the MAC to put Sun Country on firmer financial ground over the next two years.

He said he continues to talk with MAC officials. "Any benefit that Sun Country would receive from this would remain within Sun Country" and not go to Petters Group Worldwide, Gadek said.

Said MAC spokesman Patrick Hogan: "We are considering the airline's situation and exploring whether there are meaningful steps we can take to assist them. We have not reached any conclusions."

Liz Fedor • 612-673-7709

  • about this series

  • The Star Tribune's coverage of the federal fraud case against entrepreneur Tom Petters and the struggles of Petters-owned Sun Country Airlines.

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