Sun Country prepares for takeoff

  • Article by: SUZANNE ZIEGLER , Star Tribune
  • Updated: April 21, 2010 - 8:25 AM

Bankruptcy. Petters. The recession. Under seasoned airline executive Stan Gadek, Sun Country has survived all three and is ready to soar.

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Stan Gadek, president and CEO, Sun Country Airlines. Sun Country has created Sun Country Vacations, expanding into cruise line vacations and taking over business from the defunct Hobbit Travel.

Photo: Glen Stubbe, Star Tribune

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On the main wall of Stan Gadek's office hangs a photo of him with all of Sun Country's employees taken in October 2008.

Tom Petters had just stepped down as the company's chairman, days before being arrested on charges of running a multibillion-dollar Ponzi scheme.

Workers had just agreed to a temporary 40 percent pay cut, with Gadek ceding all of his salary. With no access to Petters' cash, the airline was forced to file for bankruptcy.

But in the large, framed photograph, everyone smiles.

"Not one person in that picture, including me, had a clue what the future held," Gadek said in a recent interview at his office in the company's Mendota Heights headquarters. "The owner's been carted off to jail. We had pay cuts. But we're all smiling because we all knew the talent and determination we had."

Turns out the group had reason to be hopeful. Under Gadek's wing Minnesota's remaining airline, best-known for ferrying frozen Midwesterners to warm destinations in winter, has gone from steep losses -- $60 million in 2007 and 2008 combined -- to profits. The low-fare carrier made $1.4 million on $202 million in revenue in 2009. This year in its first quarter, typically its strongest, it earned $7.2 million.

The airline is on track to emerge from bankruptcy this summer in the black at a time when cash-strapped airlines are adding fees and cutting back on flights to save money.

Sun Country has been forced to do the same -- it collected $9 million in baggage fees last year -- but has gone even further. Looking for new revenue sources, Gadek and his team have returned to the company's roots by focusing on the leisure traveler. They launched a travel planning division called Sun Country Vacations late last year, and recently announced summer service to London starting in June and expanded cruise offerings. It's part of the company's overall strategy, he said, of evolving from just an airline to a full-fledged travel company.

"That's what has gotten us through the fuel crisis, the whole Petters situation, this economic downturn," said Gadek, a former Northwest executive who helped engineer a turnaround of AirTran, the low-cost airline based out of Orlando. "That's why we're still here today, exiting bankruptcy. We're flexible, we're nimble, we think outside the box. We're reinventing ourselves."

Minneapolis travel expert Terry Trippler said Sun Country wouldn't be around today if it weren't for Gadek. "The only bad thing about Sun Country is that Stan Gadek didn't come sooner," he said.

'Blind spot' for Petters

Asked to look back at what he walked into when he became president and CEO in March 2008, Gadek joked: "I probably didn't do enough due diligence." He called Petters, who hired him, a "blind spot" for him and everyone else. Petters was recently sentenced to 50 years in prison for orchestrating a $3.65 billion fraud through other business entities. Sun Country was never implicated in the scheme.

"I know that this is going to sound contrary to perhaps the way he's perceived publicly or through the press, but he was sincerely interested in seeing this company become successful and have it create growth opportunities for the employees," said Gadek. "He was looking for someone who had the skill set that could come in and make an immediate impact."

Gadek did just that. At that time, fuel prices were skyrocketing and he made some rapid-fire decisions to cut costs. The airline knocked off unprofitable routes, added fees and returned to flying charters for the military domestically, which allowed the airline to pass through the costs of fuel.

He went on the offense in the public perception game, too. Gadek was just weeks on the job when Trippler told listeners on a radio show that he wouldn't risk buying a ticket on Sun Country because he had heard rumblings that employees were nervous about the airline's future. The next day, Trippler said, Gadek was in his office "madder than a wet hen."

Trippler said Gadek spent about two hours with him, telling him about his plans for the airline and just "talking shop." The two parted on good terms. "I respected him for coming down there and really letting me have it," he said.

The changes, along with a drop in fuel prices later that summer, helped, allowing the company to break even by summer.

But it was still counting on Petters for a $7 million loan to serve as a financial bridge in the slow fall months until the high-revenue winter travel season began.

"But the roof fell in on us for that" when Petters was arrested, Gadek said. He arranged financing from another Petters affiliate, Elite Landings, also in bankruptcy with the rest of Petters empire.

Buoyed by the deep pay cuts and deferred payments due to bankruptcy, Sun Country drew only $1 million of the $4 million available and repaid it within 90 days.

Headwinds

When Gadek asked employees to defer a large chunk of their pay, Trippler said that the CEO went to the ticket counter agents and bag handlers himself.

"He talked to them. He didn't lie to them. He told them what he was trying to do and why," said Trippler. They were later repaid, with interest.

Sun Country's turnaround comes with the backdrop of the recession, which has largely battered the travel industry. But Gadek said that a little luck along the way has helped.

One example: Sun Country Vacations hired employees from Minneapolis-based Hobbit Travel, a popular travel agency that closed its doors in December, allowing the fledgling company to hit the ground running.

And the first booking for the London route surprised even him. "Our internal bet was: "How long after we announce it will it take for the first booking?' Well, the first booking occurred days before we even announced it." And the flight originates in London, not the Twin Cities, as he'd expected.

Gadek called it an example of the Internet leveling the playing field with the legacy carriers, which have invested millions in distribution, brand and advertising. "It doesn't make it equal, but it gives us a lot more weight than we would have otherwise," he said.

Indeed, businessman John Jacobs of Big Lake likes Sun Country's website, and its rewards program that essentially gives one free round-trip ticket for every 10 round-trip flights.

"Other programs are just crazy. You have to use more mileage than before and it's hard to get a flight," said Jacobs, a Twin Cities businessman.

Gadek said the airline is also trying to even out the ups and downs of its seasonal schedule. "You have the peaks and the troughs, and you just hope you make it to the first quarter. That's the historical Sun Country. Europe has the potential of becoming the Mexico of the summer for us, if we execute it right."

Sun Country Vacations, he said, ultimately has the potential to generate even more revenue by building its network over time.

"You can't just depend on tour operators. You can't just depend on travel agencies. You can't just depend on online. If you're going to be able to scale this up, you need to incorporate all those channels of distribution."

Another owner coming?

When it emerges from bankruptcy in June, the airline's ownership shifts to its creditors, including some Petters entities and onetime owner Whitebox Advisors.

"Our goal is to make Sun Country healthy and profitable to make it as attractive as possible and sell it," said Doug Kelley, the court-appointed receiver in the Petters case who is handling what he said is Petters Group Worldwide's nearly 50 percent interest in Sun Country. He hopes the airline will fetch something in excess of $30 million.

"They've done some bold moves -- they've positioned themselves to fly to Europe -- to attract a buyer at some point," Kelley said.

Michael Meyer, Sun Country's bankruptcy counsel, said the creditors will run the airline for now with current management in place. "But they want to prepare the company to be sold -- that will be their ultimate strategy. How long that will take to get there is anyone's guess."

In bankruptcy, potential unnamed buyers emerged but the value that resulted from the process, between $10 million and $30 million, were deemed too low. "If the creditors really thought it was worth in the $10 million to $30 million range, they probably would force a sale right now," he said. "I think they see an upside."

For his part, Gadek said that while he's not averse to a sale, it has to be one that makes sense and supports the "future success and growth of this company as opposed to just a financial transaction where someone buys low and sells high. That doesn't do anything for us as a company."

In his mind, the company's 800 employees deserve more. "The employees who have been here since Day 1 have seen owners come and go. And if there's one common thread among all the employees, it's their desire to see this company succeed regardless of the challenges the different owners have brought."

Staff writer David Phelps contributed to this report.

Suzanne Ziegler • 612-673-1707

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