Sun Country Airlines

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Sun Country Airlines

2520 Pilot Knob Road
Suite 250
Mendota Heights, Minnesota 55120
U.S.A.
(651) 681-3900
(800) FLY-N-SUN; (800) 359-6786
Fax: (651) 681-3970
Web site: http://www.suncountry.com

Private Company
Incorporated: 1982
Employees: 1,200
Sales: $250 million (1998 est.)
NAIC: 481111 Scheduled Passenger Air Transportation

Sun Country Airlines, operated solely as a vacation charter service for most of its history, became a scheduled carrier on June 1, 1999, offering nonstop flights to and from Minneapolis/St. Paul, Milwaukee, and Detroit to major U.S. cities and international destinations. The company, owned by Milwaukee-based leisure travel mogul William E. La Macchia, Sr., competes head-to-head with industry giant Northwest Airlines, while it continues to operate some charter flights in conjunction with wholesale tour operators.

Pilots Take Off: Early 1980s

Sun Country Airlines, the brainchild of former Braniff International pilots, took flight in January 1983. Following the shutdown of Braniff in 1982, Ken Sundmark sought out Bob Daniels, his former neighbor and cofounder of Mainline Travel Inc. Sundmark proposed they establish a charter service, combining the assets of Mainline and the airline expertise of the now unemployed Braniff crew. “They needed outside financing, and they also needed a reliable market, something more steady than the topsy-turvy world of post-deregulation scheduled services,” wrote Peter Reed in a February 1987 Corporate Report Minnesota article.

Mainline, which owned MLT Vacations Inc., had already toyed with the idea of owning its own plane to serve its vacation travel market and willingly signed on for the ride. Mainline’s principle owners, Daniels and MLT CEO Warren Phillips, retained 51 percent of ownership. Eleven Braniff pilots, two cabin attendants, an attorney, and a financial consultant shared the remaining 49 percent.

Sun Country Airlines was incorporated in July 1982 but implementation of service was delayed by higher than expected start-up costs. Airport facilities, fuel suppliers, maintenance contractors, and airplane lessors all required large deposits on their goods and services. MLT committed additional funds, in the form of a letter of credit for the deposit on the airplane and a cash loan of $250,000, to get Sun Country’s inaugural flight from Sioux Falls to Las Vegas, in the air. At first, Sun Country flew just one aircraft, a Boeing 727–200.

The company quickly became profitable, within six weeks according to the Reed article, and was able to pay back MLT’s loan within eight months. Net income was $180,413 for the first fiscal year and $1.47 million for fiscal 1984. Headquarters were less than glamorous. Sun Country operated out of an old freight building. That space and the rented hanger had once been Braniff’s—the defunct airline frequently housed planes overnight at Twin Cities International, then flew them out as charters.

During the early days and from the top on down, Sun Country employees had multiple roles to perform. Company executives flew aircraft. Flight attendants acted as receptionists and baggage handlers in a pinch. Pilots updated manuals and even pitched in to clean the company’s aircraft.

In addition to sharing the workload, Sun Country’s employees shared the knowledge that they were responsible for the financial health of the business—the fate of Braniff and other airlines was still fresh in their minds. Sundmark, Sun Country vice-president of finance, gained his financial know-how while serving as a representative of the Air Line Pilots Association. Peter Reed wrote, “Sundmark’s formula for Sun country’s success is simple: ‘Cost control, cost control, cost control.’ ”

To survive, Sun County and every other airline had to keep its seat per mile cost down. The seat-mile measurement was tied to a number of factors. Key among them was the number of seats being filled. During the first three-and-a-half years of operation Sun Country’s average load exceeded 90 percent, thanks to MLT. The travel company purchased seats from Sun Country, packaged the air travel with hotel and a variety of other services, and then sold the packages via travel agencies. Consequently, Sun Country had no marketing costs, and by leasing its aircraft, terminal, and office space, the tiny airline kept debt service costs off its books.

Sun Country, unlike other U.S. charter companies, depended primarily on vacation travel business; other charters gained revenue by seizing opportunities to fly military, cargo, and summer vacation charters to Europe. Although Sun Country had remained profitable from the start, their business was highly seasonal, concentrated around the Midwest’s peak tourist season, January through mid-April.

Attempting to balance the seasonal flux of revenue, Sun Country added new destinations and flights originating from cities with different travel patterns. The Dallas/Fort Worth area, for example, generated a travel market to Las Vegas even during the summer months. More importantly in terms of revenue growth, Sun Country increased capacity during winter months by leasing additional planes from a British carrier whose peak times occurred during the summer. Sun Country began with one additional 727 in December 1983, upped it to two planes during the next two years, and moved to three during the 1986–87 winter travel season. In January 1986, to accommodate growth, Sun Country moved into a new facility. In June, the company leased its first wide-bodied plane, a DC-10, which offered larger capacity and longer flight time than the 727s.

Turbulent Air, New Ownership: Mid-1980s to Mid-1990s

As Sun Country operating officers pushed to keep the airline growing, the majority owners at Mainline were increasingly concerned with the small charter service’s ability to compete in an increasingly tough market. Major airlines had begun discounting fares, placing them in line with what Mainline paid for Sun Country seats. In that light, Phillips and Daniels struck a deal with NWA Inc., parent company of Northwest Airlines, to sell both Mainline Travel and Sun Country Airlines.

Members of the Braniff ownership faction felt the deal overvalued Mainline and undervalued Sun Country—$22 million and $5.5 million, respectively—and sued to block the purchase. A compromise deal was reached but rejected by two of the shareholders. The sale of Mainline was completed in 1985, but NWA dropped the bid for Sun Country. Sun Country eventually tried to force the dissenting shareholders to sell their shares to the company; the matter was tied up by litigation for several years. In late 1988, Midwest banker B. John Barry purchased majority ownership of Sun Country from the original investors.

Publicity shy Barry, who owned 12 Minnesota and Wisconsin banks with combined assets of $530 million, maintained a low profile over the next several years. The Gulf War changed all that. Thanks largely to military charters, Sun Country’s revenue increased by 38 percent to $109 million, and net income more than doubled to $9.7 million for the 12 months ending June 30, 1991.

Sun Country’s bottom line had also been aided by a decline in the number of charter companies. About 15 carriers had been in operation during the mid-1980s, but only a handful remained viable, including American Trans Air (Indianapolis), Tower Air Inc. (New York), and Key Airlines Inc. (Georgia). Sun Country was the third largest charter airline in the United States.

Historically, Sun Country had expanded conservatively, a practice which had helped the airline weather the industry downturn. The company had no long-term debt. Barry, encouraged by the year’s growth, pushed forward with an aggressive expansion plan. He intended to add two DC-10s and four or five 727s to the aircraft already in service.

While the military charters had produced a good-sized blip on Sun Country’s revenue screen, MLT continued to be a very important customer. The small carrier was also closely tied to MLT’s sister company Northwest Airlines. Sun Country leased both airport facilities and a number of its planes from Northwest. (The Sun Country hanger had been purchased by NWA at the time of the MLT deal.) However, the relationship between the two companies was changing. In late 1990, NWA had notified Sun Country that it would not be renewing its lease on the facility or on some of its planes. (Significantly, Northwest Airline had begun operating its own quasi-charter service which it sold via Mainline; discounted tour seats and vacation packages were booked on regularly scheduled Northwest flights.)

Company Perspectives:

At Sun Country Airlines, we realize that it’s hard to find justice in today’s world of high-priced airfares. So whether you’re traveling for business or pleasure, we’d like you to consider us as your low-fare alternative. As a privately-owned airline, we take pride in making the Twin Cities our home. After 15 years and over 12 million customers, we remain committed to providing you with an affordable, reliable way to travel.

The changes in climate with NWA factored into Sun Country’s declining numbers in 1992. When NWA chose not to extend its DC-10 lease agreement with Sun Country, the smaller operation was forced to pump out dollars for repair and maintenance costs associated with the return of the aircraft sooner than anticipated. Also eating into Sun Country’s profitability was a rebound of competition in the charter industry. A drop in aircraft leasing prices had encouraged start-up companies to join the fray. Sun Country, on the other hand, was still carrying higher rates. Moreover, a price war among the major carriers forced fares downward in all categories. On a positive note, passenger numbers remained solid, and NWA decided to extend the facility lease after all.

Even as Sun Country grew, charter demand fell, as more large airlines offered comparable service. Sun Country launched its own vacation travel package program late in 1995. Doug Iverson reported in December 1995 for Knight Ridder/Tribune News that some industry observers speculated the “move could be the beginning of a major rift” between Sun Country and NWA. “In the past, Sun Country flights to 12 cities were marketed through MLT. Since Northwest was essentially getting a cut, observers believe the airline didn’t fight back and allowed cheaper flights to such destinations as Detroit, Chicago, Cleveland and Newark.”

In early March 1996, Sun Country moved into direct competition with Northwest by offering discounted summer fares to locations such as Boston and J.F.K. in New York. Sun Country hoped Twin Cities travelers, who, according to American Express Domestic Airfare Index, paid 25 percent more than the national average for flights, would flock to their gates. Northwest, which controlled 80 percent of the Twin Cities air market, was quick to respond to the challenge. The giant airline slashed its fares. Sun Country had to reduce its fares, thus putting their profit margins in jeopardy.

In August Sun Country announced that it had lost 50 percent of its MLT business for the 1996–97 winter vacation season. The airline said that the cut-back was related to the reallocation of resources to scheduled flights. The business with MLT had been producing 25 percent of the charter company’s annual revenue of more than $200 million.

Travel Mogul at the Helm: Late 1990s

Mark Travel Corporation owner Bill La Macchia purchased Barry’s majority interest in Sun Country in the spring of 1997. La Macchia’s Funjet vacation package firm had been doing brisk business with Sun Country since the mid-1980s. At the time of the sale Sun Country employed 1,000 people and operated flights from 23 cities. Privately held Mark Travel, based in Milwaukee, generated annual revenue of about $600 million.

Sun Country was on the slide when La Macchia took over. Operating profits which had been about $9.57 million in 1994, fell to $2.1 million in 1995, and plummeted again in 1996. Barry’s venture in scheduled service had nosedived, scuttled by the combination of a meager marketing effort and Northwest’s aggressive response to the competition.

“They got beat up terribly,” La Macchia said of Sun Country’s initiative against Northwest, in an April 1997 Star Tribune article by Tony Kennedy. “My focus is not scheduled service. I’m in the package business.” (Barry retained some shares and remained on the board of directors as did founding pilot and CEO John Skiba. The Barry family and Skiba had been the only stockholders prior to the sale.)

La Macchia’s son, Bill, Jr., called back from a nine-year stint of working in the Las Vegas hotel and casino business, was named COO of Sun Country. Six months later he was promoted to president. “Since then, La Macchia has steered the privately held company out of crisis and driven its growth by booking travel directly rather than relying on charter sales to wholesale tour operators,” wrote John Rosengren and Paul Duncan for Corporate Report in February 1999.

The turnaround was aided by a 15-day strike by Northwest pilots in late August 1998. Seizing the opportunity, Sun Country added seats and new business destinations, and backed the effort with a $1.5 million advertising campaign. Bookings tripled and bolstered a traditionally slow period. The airline maintained pre-strike prices in an effort to earn the good will of frustrated Northwest travelers. Sun Country ran a two-for-one post-strike promotion hoping to bring back customers gained during the Northwest walk-out, but the bigger player countered with its own two-for-one ticket special.

In January 1999, Sun Country was offering 81 nonstop flights to 23 domestic destinations plus winter travel flights to five Caribbean Islands. The majority of the 2.6 million travelers the airline had carried in 1998 had been vacationers. The charter business still brought in more than 80 percent of sales, but the La Macchia’s were positioning themselves to change all that. Sun Country planned to alter the scheduled service to charter service ratio to 60/40, respectively.

The new plan was a far cry from the course La Macchia, Sr., had chartered when he took over the struggling airline. The change in mindset was due to “economics,” according to Sun Country marketing director Lori Barghini. “As a charter we don’t have the option of doing anything to our schedule,” she said. “And charter operators want to fly on a Friday or a Sunday. We have to fly every day to make a profit.”

La Macchia was used to making a profit. Mark Travel’s estimated fiscal 1998 net profit was $20 million. Leisure Travel News had named La Macchia one of the 25 most influential tour and travel industry executives on three different occasions. He had deep pockets. “I could probably support the needs of Sun Country for a long time,” La Macchia said in an April 1999 Star Tribune article by Kennedy, “but we have to make a profit. The community has to support Sun County to enjoy a competitive market.”

After putting $41 million on the table for 75 percent of Sun Country’s stock, La Macchia saw net losses of $11.7 million in fiscal 1997. It was more than he had expected. Eager for total control, he purchased the remaining Sun Country shares in the summer of 1998. Now the profits and losses were all in La Macchia’s hands.

La Macchia was going head to head with the nation’s fourth largest airline, and Northwest had a history of driving small carriers out of the market. Sun Country, according to Rosengren and Duncan, faced some internal barriers to success as well. The airline lacked a frequent flyer program, was viewed as a vacation airline by business travelers, contended with already cramped terminal conditions, and had limited listing in the central reservation system used by travel agents.

Aware of its internal weaknesses, Sun Country had a frequent flyer/loyalty program in the works and tapped into Mark Travel’s sophisticated computer resources for its reservation system. The existing Hubert H. Humphrey charter terminal at Twin Cities International was receiving a makeover, and a new terminal, with Sun Country as the anchor tenant, was scheduled to open in 2001.

Determining to Fly High in the Future

Sun Country positioned itself as an underdog fighting giant Northwest. Playing off of ex-wrestler Jesse Ventura’s unexpected victory in the 1998 Minnesota’s governor’s race, a billboard read: “Jesse Did It—Why Can’t We?” The billboard campaign was just one piece of a multimillion-dollar marketing push. Print ads featured a mail-in coupon offering a chance to win a year of free travel. Company president Bill La Macchia, Jr., appeared on the small screen pedaling his family business door-to-door. Radio ads emphasized low fares and cultivated a connection with the flying public.

With about 500 daily flights and 410 planes, Northwest badly outgunned Sun Country, which had just 15 planes and flew a maximum of one time per day to the 15 cities it served. Eric Torbenson wrote on the eve of scheduled service, “La Macchia Sr. knew going in that he couldn’t compete on price, nor on the number of flights. He hopes to win over Twin Cities travelers with great service. With just a few more than 1,200 employees company-wide, compared with 50,000 at Northwest, Sun Country feels the camaraderie of its flight crews will help set it apart from Northwest.”

As the low airfare battle with Northwest heated up during the early summer, La Macchia made some other moves. Mark Travel purchased Trans Global Tours and strengthened its position in the Twin Cities market. The Twin Cities-based vacation charter business ranked second to NWA-owned MLT Inc. Sun Country announced the addition of state-of-the-art Boeing 737–800 series aircraft to its fleet beginning in January 2001, and that it would become a signatory carrier in Seattle, thus receiving a terminal location comparable to the larger airlines.

But these victories were small in comparison to the risks it faced in its fight with Northwest. In April 1999, La Macchia told the Star Tribune he was willing to spend up to three years building the Sun Country business, but his task was daunting. No other larger carrier had successfully bridged the gap from charter to scheduled airline. La Macchia, however, was determined to give it his best shot.