The Tom Petters fraud case

Sun Country warns of shutdown

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: October 2, 2008 - 9:38 PM

Airline leaders say they expect to survive a cash crisis but warned of layoffs or a shutdown as early as Dec. 1 to comply with a 60-day notification law.

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A Sun Country Airlines Boeing 737-800 is fueled on the tarmac at MSP Humphrey Terminal.

Photo: Glen Stubbe, Star Tribune

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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.

The Mendota Heights-based carrier had planned to get a short-term loan from its owner, Tom Petters, to address a cash shortage at the end of this year. But Petters, the airline's majority shareholder, resigned as CEO of Petters Group Worldwide Monday because he is the target of a major federal fraud investigation.

Sun Country, which is not being investigated, now is scrambling to ensure it has enough cash to operate until it reaches the heavy winter travel season, when management expects it to turn a profit.

John Fredericksen, Sun Country's general counsel, called the airline's situation a "serious financial crisis" in a letter that was sent to employees late Wednesday.

He wrote: "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."

But he emphasized that the carrier is seeking solutions to the problem and executives are "confident that we will find ways to get through this."

The letter that Sun Country sent to its 850 employees meets the federal requirement that they be notified 60 days in advance of large job cuts.

"We are doing everything in our power to make sure that we stay viable," Sun Country spokeswoman Wendy Blackshaw said Thursday. "Our vendors are in discussions with us and they've been very helpful."

Beginning in December, ticket sales "through our peak season are far beyond what they were last year," Blackshaw said.

But she said that Sun Country has been forced to take major actions -- including a 50 percent pay deferral for employees -- to improve its cashposition.

Sun Country is the second largest carrier in the Twin Cities and the low-fare airline provides competition to the much larger Northwest Airlines.

"It's the consumers who will help determine whether Sun Country survives," Terry Trippler, a Minneapolis-based airline expert, said Thursday.

"Would I buy a ticket from Sun Country for travel in October and November? Yes I would, because that's the hump they have to get over," Trippler said.

Consumers looking to fly Sun Country beyond Dec. 1 are not at risk of losing their money should the carrier shut down, the airline said. Credit card companies hold funds on advance ticket purchases until the flights have occurred, so consumers either will fly or get refunds.

But that holdback is one of the contributors to Sun Country's cash squeeze, said CEO Stan Gadek. He estimated that about $25 million of Sun Country's ticket-sales revenue is being held by the credit card companies.

Gadek, who Thursday was named to replace Petters as chairman of the board, has forecast that the airline will make money in the first quarter, and he said it was profitable in July and August despite much higher fuel prices than in 2007.

Smaller losses expected

The airline had a net loss of $47 million on operating revenue of $251 million in the four quarters that ended in June. But Gadek has estimated it will report small losses in the third and fourth quarters of this year that will be significantly less than the previous year.

Since he became CEO in March, Gadek has cut costs, raised fares and fees and attracted additional charter flying that recovers fuel costs.

Todd Tarvestad, a Sun Country pilot from Princeton, Minn., said he has confidence in Gadek because he's made dramatic improvements in Sun Country's business model.

"A year ago, we were bleeding money pretty badly," Tarvestad said, but he added that he's impressed Gadek produced small profits this summer. If consumers continue to fly on Sun Country, Tarvestad said, "Sun Country will be a strong Minnesota employer for years to come."

Pay drops Tuesday

On Tuesday, Sun Country's employees are expected to receive checks with 50 percent pay cuts. Gadek has pledged to reimburse them -- with interest -- during 2009.

Late Thursday, the pilots union at Sun Country was meeting to discuss its response to Gadek's plan to move forward with that pay cut.

Earlier this year, unionized pilots, flight attendants and dispatchers ratified 10 percent pay cuts to help reduce the airline's operating costs. Now Gadek is asking them to make a deeper sacrifice.

The carrier has operated in Minnesota for 26 years. It survived a 2002 bankruptcy, and it has been ranked among the top five airlines nationally for customer service.

Beyond the current cash crunch, the dwindling economy also could take a toll. Many of Sun Country's passengers are leisure travelers. In coming weeks, they'll be deciding whether to take a winter vacation to Mexico or save that travel money for food or gas, said William Swelbar, an aviation expert at the Massachusetts Institute of Technology.

"The most important thing for them is a weak economy," Swelbar said.

"If Sun Country were to go away, I think Southwest Airlines will begin to fill some of that void," he said. Southwest announced Wednesday that it will begin daily service between the Twin Cities and Chicago Midway in March.

Trippler is hoping that Sun Country survives, because he said it provides huge savings for Minnesota consumers. In addition to offering low fares, he said that Sun Country holds down fares on Northwest.

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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