Sun Country says fuel cost creates need for MAC aid

Sun Country Airlines, which expects to burn $40 million in cash this year, made a plea for help from the Metropolitan Airports Commission on Wednesday. But executives did not make a specific request.

"We're not asking for a handout or a bailout," Sun Country CEO Stan Gadek told members of a MAC finance panel. But he said the Mendota Heights-based carrier needs some assistance over the next two years while coping with high fuel prices and adapting its business model to an industry that's now cutting capacity.

The low-fare carrier, which has a 4.4 percent share of the Twin Cities market, lost $43 million on operating revenue of $243 million in the four quarters ending in March.

Petters Group Worldwide, based in Minnetonka, owns all the voting shares of Sun Country. Gadek said that CEO Tom Petters wants to preserve Sun Country as a scheduled-service carrier in Minnesota, so he has approved more than $25 million in loans from his parent company since the fourth quarter of last year.

In June, Sun Country's leaders started talking to Minnesota legislators about the carrier's financial woes. They are emphasizing Sun Country's contributions to the Minnesota economy, including a $40 million payroll and $63 million in payments to Minnesota vendors in 2007.

While Sun Country leaders previously said they may need as much as $50 million in aid over two years, Gadek and Petters Aviation President Jay Salmen didn't cite any figures Wednesday in their appearance before the committee.

Salmen raised the option of a "non-cash solution" to the airline's current financial problems, such as a MAC loan guarantee.

"It's clear that they need a bona fide plan," Lanners said. "How is it going to increase jobs and air service in Minnesota? How are they going to compete and survive in an industry in turmoil? What guarantees do they make, performance guarantees?"

Gadek noted that oil was trading at $72 a barrel a year ago, and has traded in the range of $120 to $145 in recent weeks.

Sun Country's 2008 business plan was built on oil at $85 a barrel but has been revised to $125. "We are totally exposed," Gadek said, explaining that it has no fuel hedges.

Based on Sun Country's weakened financial condition, Gadek said that credit-card processors are holding back payments to Sun Country. "We don't get dollar one until the first day of travel" by a customer, he said. That has crimped Sun Country's cash flow.

Commissioner Dan Boivin said he's heard speculation from the public that if Sun Country fails, Southwest Airlines or other carriers would fill the void.

Sun Country executives estimated that Twin Cities-area consumers will save $275 million to $300 million on airfares this year because Sun Country helps restrain Northwest's fares.

They also showed what can happen when a low-fare carrier exits the market. When Northwest and AirTran Airways were both serving the Chicago Midway market, they said, the lowest round-trip fare on both carriers was $132. But Northwest raised that fare to $218 in May after AirTran left the market. On Northwest's website Wednesday, a 14-day advance ticket was $229 round-trip.

Delta Air Lines intends to acquire Northwest by the end of this year. Sun Country, in recent weeks, has been marketing itself as the "hometown airline." Gadek said that Sun Country's brand and reputation for good customer service are "solid gold" in an industry that has neglected service in recent years.

While Sun Country only expects to fly 10 737s this winter, Gadek said executives have discussed expanding the fleet to 30 planes after they stabilize the carrier's finances. A tripling of the fleet would mean 1,000 or more new jobs, he said.

But for the moment, Sun Country is facing a precarious financial situation.

Despite the huge jump in fuel cost, Gadek said that Sun Country's average fare has risen only 9 percent. The average one-way fare on Sun Country was $134 last year, and Gadek said it was $146 for the first half of this year.

Commissioner Mike Landy said he sees other carriers charging much higher prices and departing with full airplanes. "I think you might be leaving some money on the table," he said.

Although Sun Country has cut jobs and employee wage rates and raised fees on its customers, Landy said he thinks the airline still needs more "self-help." Chairman Lanners said the MAC has its own financial challenges. For the first half of this year, the MAC's revenue is running about $3 million, or 2.43 percent, short of its budget. Expenses are about $3.1 million, or 2.58 percent, under budget.

"It is a difficult time for anyone to ask for favors, money, support or guarantees in this business," Lanners said. "We're tightening down the hatches for an uncertain future in the industry."