SNCY - NASDAQ

Welcome to the Sun Country Airlines Third Quarter 2025 Earnings Call. My name is Marvin, and I'll be your operator for today's call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Thank you. I'm joined today by: Jude Bricker, our Chief Executive Officer; Torque

Thanks, Chris. Good morning, everyone. Thanks for joining us. Our diversified business model is unique in the airline industry as demonstrated by our 13 consecutive profitable quarters. Due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule flexibility and low fixed cost model allows us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe due to our structural advantages, we'll be able to reliably deliver industry-leading profitability throughout all cycles. As discussed on prior calls, in 2025, Sun Country is focused on cargo expansion as we execute on the planned growth of the cargo fleet to 20 aircraft. Today, all 20 aircraft are in operation. Our third quarter cargo revenue for September is up 60% year-on-year, and we expect it to move to over 75% by December based on the current schedule. Consistent with our plans, cargo growth has displaced some scheduled service flying. The year-on-year cuts in scheduled service were largest in 3Q, and we'll be focused on recovering those levels in the next several quarters. I expect to be able to show positive year-on-year scheduled service growth by 3Q '26. For me, the most positive news in the quarter was the inflection in scheduled service TRASM. 3Q TRASM was up 1.6%. However, for September, it was up over 7%. Currently, we expect 4Q TRASM to be up over 6%, with 1Q 2026 it advances even stronger. Our revenue strength is across all regions of our network. And based on our current industry selling schedules, I don't see any reason that those trends shouldn't continue. I continue to expect to achieve $300 million of run rate EBITDA after the second quarter of 2027, operating the fleet we currently have on our balance sheet. The timing of full implementation may be delayed by many factors, some beyond our control. The aircraft that we lease out will be redelivered through the end of next year, and we project that utilization will continue to increase as we train crews to increase block hours. Another positive in 3Q was charter production. We had an all-time record volume while also growing revenue per block hour by 4% year-on-year. In the backdrop of a strong -- of strong demand for charters, we're able to allocate surplus capacity into this segment. This helps offset some of the underflying of scheduled service. Our ability to flex capacity between charter and scheduled service continues to be a competitive advantage, especially in this environment. Finally, and perhaps most important for our long-term success, we continue to execute a safe and reliable network with 3Q controllable completion factor of 99.3%. Operations as varied as ours are difficult. It's a team sport. I continue to be impressed by all our employees that make it happen for our customers every day. With that, I'll turn it over to Torque.

Thank you, Jude. As Jude mentioned, this quarter marked the completion of our cargo expansion with all 20 aircraft now operating under the contract for Amazon. Adding 8 additional aircraft to our fleet was truly a team effort and represents a 14% increase in our total fleet. As such, we remain in a transition period while we begin to annualize our cargo growth and then begin to grow back our passenger service business to the pre-2024 utilization and expand our passenger fleet to 50 aircraft by mid-2027. During this transition, we have remained profitable thus far and as Jude mentioned, produced our 13th consecutive profitable quarter. Our GAAP EPS for the third quarter was $0.03 and while our adjusted EPS was $0.07. GAAP pretax margin was 8%, while adjusted pretax margin was 2%, our fourth consecutive quarter of year-over-year adjusted margin expansion. Third quarter total revenue was $255.5 million, a 2.4% higher than Q3 2024 on a 3.8% increase in total block hours. Revenue for our passenger segment, which includes our scheduled service and charter business, was down 3.2% year-over-year, primarily on a greatly reduced schedule and service operation as we completed our transition to the increased cargo fleet. Our scheduled service business strengthened throughout the quarter. August total fare increased 2.6% versus last year, while August load factor increased 2.7 percentage points to 87%, which was the highest monthly load factor this year. September saw an even better performance as total fare was up 4.5% versus last year and load factor increased 3.2 percentage points to 83%. Scheduled service ASMs were down 10.2% in the third quarter as we shifted resources to facilitate the dramatic growth in our cargo segment. While we will not be adding additional cargo aircraft in the fourth quarter, we will still be annualizing the new growth. Thus scheduled service ASMs are still expected to decline between 8% and 9% in Q4 2025 versus last year. Third quarter revenue continued to show strength. Charter revenue grew 15.6%, while charter block hours increased 11.1%. Excluding the impact of fuel revenue reconciliation, charter flying grew 16.7%. The flexible nature of our charter business was on full display as block hours dedicated to ad hoc charter opportunities grew 31%, which helped offset the slower build in the third quarter cargo block hours. Charters flown under long-term contracts still account for 77% of the charter block hours, which was down from 80% last year. Revenue in our cargo segment, [ 50.9% ] in Q3 to $44 million, which was the highest quarterly cargo revenue in our history. Cargo block hours grew 33.7% in the third quarter as all 20 cargo aircraft were in service by late August. This transition was a bit slower than we expected going into the process. As such, it drove pilot costs higher as we hired up for a greater level of block hours in the quarter. Cost. Now turning to costs. Our Q3 total operating expenses grew 3.6% on a 3.8% increase in block hours. If you exclude fuel and special items, our operating expense in Q3 was actually lower than it was in Q2 despite having 1.3% more block hours in Q3 than in Q2. CASM in the quarter was up 10.3% versus the same period in 2024, while our adjusted CASM increased 5.2%, both heavily influenced by the 10.2% drop in scheduled service ASMs. Salaries grew in Q3 15%, in large part driven by a 10.6% increase in employees, the increase in pilot contractual rates from the beginning of the year and flight attendant contracts ratified in Q1. Maintenance in the quarter increased 13.5% due mostly to the occurrence of unplanned maintenance events. Now regarding the balance sheet, at the end of the quarter, we closed on a $108 million term loan facility with a fixed rate of 5.98% per annum. This allowed us to pay off the March '23 term loan, which had a materially higher interest rate and refinanced our 5 737-900ER aircraft. We still have not drawn down the entire $108 million and expect to receive the remaining $54 million by the end of 2025. Our total liquidity of $298.7 million in the earnings release includes this amount. In addition, we spent $10 million for share repurchases in the quarter and have $15 million remaining in our previously announced share repurchase authority. Year-to-date, we have completed a total of $20 million in share repurchases. We have also spent $29.1 million through the year in CapEx and expect to spend between $80 million and $90 million for the full year of 2025. As a reminder, we do not expect to have meaningful aircraft CapEx until later in 2027 as we still have owned aircraft on lease to other carriers that will redeliver to us throughout 2025 and 2026. These 5 aircrafts will drive growth in the passenger segment for the next couple of years. Net debt at the end of the third quarter was $406.1 million, down from $438.2 million at the beginning of the year. Now turning to guidance. We expect the fourth quarter total revenue to be between $270 million and $280 million on an increase in block hours of 8% to 11%. We are anticipating our fuel cost per gallon to be $0.025 (sic) [ $2.50 ] for us to achieve an operating margin of 5% to 8%. Our fourth quarter is also burdened by an acceleration of some heavy maintenance costs that we plan to pull forward from 2026 to manage the maintenance of our fleet. Our business is built for resiliency, and we will continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, I'll open it up to questions.

[Operator Instructions] Our first question comes from the line of Brandon Oglenski of Barclays.

Jude, how do we think -- and I don't mean this to be a near-term question, but just given that cargo is going to be a bigger mix going into early 2026, how does that impact the seasonality of the business? Because traditionally, you guys get a pretty big margin in the first quarter with folks leaving Minneapolis.

Brandon, yes. So I'll answer that a couple of ways. First is the ramp-up has been slower than we expected for cargo. We're rostering December in a couple of weeks, and we're planning a block hour production in the cargo fleet of over 5,000 hours. And that's about what we would expect the run rate to be on a permanent basis, subject to out-of-service time related to planned maintenance. So that's going to be the effect of the cargo operation through most months in 2026. We still will have a really seasonal operation because the value of cargo, whether it's -- the scale that it was last year or the scale that's going to be next year is that we can fly higher peaks. And the negative effects of the cargo implementation in the third and fourth quarters has been that we had to cut down peak period of flying in order to accommodate cargo growth, and that will be rebuilt in the subsequent quarters. And so we'll be repeaking the schedule, which will actually potentially increase seasonality of our business as we expand March -- into March '26 and March '27. So I don't think there's going to be much to change the seasonality of our business. Our first quarter is always going to be massive.

Okay. I appreciate that. And Torque, congratulations on the new role here. I guess it'd be great to get your impressions being there for a while now. And also, I think you made some commentary around maintenance costs in the third and fourth quarters. So maybe if you could elaborate on that.

Yes. We just -- when we talk about our maintenance cost, that's really driven by the fleet that we have. We've expanded fleet, and there's more maintenance required in there. I don't know, Steve, if you want to?

Yes. It's an opportunity to pull it into 2025 to stabilize the maintenance demand and provide a more predictable platform to run our business.

The lumpiness of maintenance will always be heavy checks, including engine repairs. And this is a relatively high period for us.

Our next question comes from the line of Catherine O'Brien of Goldman Sachs.

So you guys noted that fares and loads were strong in August, September accelerated from August. I guess is that continuing into the fourth quarter? I know, there's some pretty tough comps on an industry basis in late November and December, but you've got capacity down year-over-year. Just any color you can provide us on how you see RASM progressing through the months of your 4Q outlook? And any read on the holiday bookings would be great.

Yes. I mean, certainly, listening to earnings calls across the industry, it appears we're on an island. And it looks really strong. I don't have any negatives. I mean we had over -- as I've mentioned earlier, we had over 7% TRASM improvement in scheduled service in September. Off-peak periods will be more responsive to capacity changes for TRASM impact. In other words, cutting down September has a greater impact on TRASM than it would in the peak period when all the flying is strong, for example. But we're moving into our winter peak season. Sales look really, really strong into the winter period. Our guide reflects an over 6% TRASM year-on-year improvement for the third quarter. I mean there's just nothing worrisome in advances right now across the network. I'm not seeing any competitive movements that give me pause or any year-over-year weaknesses. Minneapolis is becoming a 2-airline market, as we talked about in the past with the removal of Allegiant and Spirit from our home market. I don't know, it just looks really good. I don't have anything negative to speak of.

Happy to hear. I'll take it. I guess maybe one for Torque or someone else, and welcome, Torque. On my math, CASM ex fuel is accelerating quite a bit into the fourth quarter. I'm getting to like mid-teens inflation, but then on a block hour basis, closer to 5% year-over-year. I guess, first, lots of moving pieces. So can you correct me if I'm wrong? And then give us some color on the impact of that maintenance pull forward is having in the fourth quarter? And then maybe just higher level, as cargo inductions are behind you and the start of service further behind you, any preliminary thoughts on what 2026 capacity and unit cost inflation could look like high level? I know last quarter, you mentioned you expected cost pressure to persist through first half. So sorry, that's kind of a twofer for my second one.

Yes. Thanks. Well, I think when we look at our maintenance coming up, we've got $2.4 million of heavy maintenance forecasted in 2026 right now. So that's certainly going to...

Okay. That's from '26.

Yes, sorry, from '26 -- sorry, pulling that into Q4. Sorry about that?

Yes. On capacity, we mostly think about capacity while we have more aircraft than block hour. So we're block hour constrained. So credit hour growth '26 over '25 will be about 10% -- now those credit hours consumed in cargo don't produce the same amount of block hours as those credit hours that are going to be consumed by scheduled service flying. So our block hour growth will be lower than our credit hour expansion because of the cargo expansion, if that makes sense. The real thing that I'm most focused on to try to get us back into the mid-teen annual operating profit margin is going to be the expansion of scheduled service flying in peak periods, which currently is constrained by our credit hour constraints. So as we hire pilots and continue to add and upgrade pilots, then those numbers will expand, and that's the highest margin opportunities that we have that we're not able to execute on with current staffing constraints.

Our next question comes from the line of Tom Fitzgerald of TD Cowen.

Just sticking with labor for a minute. I remember historically, there's been a kind of just more of a broader theme of having trouble getting captains upgraded or first officers upgraded from the right seat to the left seat and there have been discussion about maybe opening a base in Florida. I'm just wondering what the latest is there and what you're thinking is right now?

There's a lot going on in flight ops here. We, for the first time ever, rostered our crews in October with PBS which drives a lot of efficiency. That was part of the 2021 deal that we did with ALPA and are finally able to execute on that. So that will drive efficiencies going forward. And we do intend to open a base. That process is ongoing. It's not going to be in Florida. It's going to be in Cincinnati in support of our largest cargo operation there. Both of those things, I think, will increase demand for captain upgrades. But you're right, it still is an issue here at Sun Country and captain upgrades are the limiting factors as we do long-range planning into '26 and '27.

Okay. That's really helpful color. Just kind of curious in thinking about the balance sheet. I know there's still some left on the current authorized buyback program. But I'd just love to get your latest thinking on capital allocation and liquidity, just as [indiscernible] with Torque on board now and where you're thinking about as we move into 2026.

I'll give you my initial thoughts and then throw it over to Torque. I mean, we have a lot of liquidity, and we're producing a lot of free cash flow. We'd love to be really opportunistic in buying metal, but we've been trying and there's not a lot out there that meets our price expectations. So I don't expect us to find a lot of CapEx opportunities. So this is going to be buybacks. That's where we are. Torque, anything to add on that?

Yes. I just think when we have capital available and if there's opportunities to deploy that, we'll be looking for those. And as Jude had mentioned, it's really -- the market is tight for aircraft and engines, and those are our primary areas we're looking for investments.

And our next question comes from the line of Michael Linenberg of Deutsche Bank.

I guess with respect to competitive capacity in your markets, I see that Spirit is actually going to bow out of the Minneapolis market in December. And I know even as recently as earlier this year, they were serving probably like a half a dozen cities. Does that free up any potential gate space? Or is there real estate there for you to take advantage of? And maybe any other airports that -- I know that they rejected leases at about a dozen airports. Are there opportunities there for you and -- as well as kind of answering the competitive capacity question in your key markets?

The Minneapolis domestic capacity -- actually, North American capacity, which is a better comp for us through the selling schedule, which we just extended out through Labor Day 2026 is flat to down. And you pointed out airlines leaving the market and Spirit isn't -- sorry to see them go, isn't serving Minneapolis beginning here real soon. They serve out of T1 and it's not -- we have our own terminal. So it doesn't really change the dynamic here. I just want to point out, we're not capacity constrained in Minneapolis whatsoever. And that's one of the strengths of the business. We can park airplanes as many airplanes as we need to. We can -- we have plenty of gate space. There's really no constraints. We do have capacity constraints in some of our major busiest airports in out stations. So Boston Logan, we have trouble extending the schedule past 1 p.m. We serve Newark and JFK, both capacity constraints, LAX, et cetera. So I mean, some pullbacks from Spirit will be healthy there and might provide more opportunities. I think primarily the impacts of Spirit because we don't have a lot of direct overlap with them, will be secondary. In other words, Frontier will move into their markets and they have big operations in Detroit and Atlanta. Obviously, that's impactful for Delta and perhaps displace some capacity here in Minneapolis. So I consider it a secondary effect. We're not at the top of the list of airlines that are going to be the most beneficial from the cuts that we're seeing at Spirit.

Okay. That's helpful. And then just a second, this goes back to your initial comments where you talked about TRASM kind of running over 6% in the fourth quarter, and then you went on to say that the 1Q 2026 advances are even stronger. At this point in time, like how much are you booked up in the March quarter?

With January is sold to 35% loads today. As advances go, our first quarter sells further in advance than the rest of our schedule. But it's not material enough to make a strong call on the first quarter. In other words, we're not sold enough to where we can be certain about the strength we're seeing, but we're selling ahead on load factor and fare, sold PRASM, which again, when we're looking out this far with low load -- relatively low sold loads can be very volatile, but we're up about 25% in January today. Now that's going to moderate because you can't you can't have a load factor increase of 10 points. I mean, it's just not possible. So I mean -- but we're going to be -- that's higher than it was for December and higher than it was in November. So it continues to get stronger.

That 35%, that's a bit higher than -- I realize that's your big quarter and it runs higher than your other quarters, but that is a bit higher than what it would be for any other carrier. You're probably 10 percentage points, 15 percentage points, 20 percentage points above your competitors.

Yes, Mike, that gets to the core of the strategy. I mean we're relevant in this community. We're a small airline, but relevant to the community we serve, and we have a differentiated model. So if you want to go nonstop to Mexico, South Florida, Southern California, Caribbean destinations, we're the carrier of choice here in the Twin Cities. [ We're expected ] to be small and relevant and big and irrelevant everywhere. And I think [indiscernible] kind of playing that out.

Yes. That's right. One last one, just to squeeze in kind of a wonky question. I see the 900 ERs are now scheduled. Obviously, they give you more capacity, so it's going to work in markets probably like Orlando and Phoenix. But is there anything interesting or unique? I mean I know they have the range for Hawaii, which you used to serve. Is there anything that we could see with the 900 ERs that may be a little bit different than maybe what you've done in the past?

Sure Mike, sorry to disappoint. I think those airplanes are just going to go on trunk routes. You can take a look at our largest markets by volume, and they're going to be 900 markets, either a mix of 9 and 8s or pure 900 markets. So just to call out a couple, Minneapolis, the Fort Myers, L.A., Vegas, MCO, Boston, Sea-Tac, those kind of markets.

Our next question comes from the line of Ravi Shanker of Morgan Stanley.

This is Katherine Bell on for Ravi. I was curious how we should be thinking about charter in 2026. I know you mentioned a bit on 3Q, but just curious what you guys are seeing for next year.

Katherine, so charter comes in a couple of different flavors. I'll just kind of call them out. We have track programs that are committed contractual flying for counterparties, and that consumes about 6 aircraft. We have a VIP operation, casino operations and Major League Soccer. Separate from those, we have a military program that's a committed program and also a lot of ad hoc flying. I just want to point out that with the government shutdown, that flying has been unaffected. It continues to be strong. And then the third is ad hoc, which mostly is sports program. So this time of year, NCA Football. And that's hard to predict because it shows up close in. We set a record, as I mentioned, in the third quarter on volumes. There's been a lot of airlines that have left the market like iAero. And then there's a huge new customer to charters in ICE. We don't work for ICE, but they're consuming a lot of charter capacity. So there's a lot of demand growth, and there's fewer people providing that lift, and it's been a really good thing for us. We still look at ad hoc opportunities primarily as a way to offload available capacity. So we'd rather commit capacity to sched service. But if we have the excess capacity, then we bid on charter opportunities. And thus far, it's been really strong. I can't give you more material guidance though, into '26 because first quarter is always kind of a trough. There's not a lot going on, but the summer should be really strong if things continue the way they're going.

Got it. That's really helpful. And just a quick follow-up. I think in your prepared remarks, you had said charter under long-term contracts came down from, I think it was 80% last year. I'm just curious why that became lower -- were some of those contracts just up? And do you go out and like look for contracts? Do people come to you? Just curious how that works.

Ad hoc mix.

Ad hoc mix?

Yes. [indiscernible]

Okay. Yes. No, our track programs continue -- they haven't grown much, except for the rate. Volumes for our casino programs, Major League Soccer and our VIP program were pretty flat. I think what's happening -- what Chris tells me is what's changed is that ad hoc grew faster and therefore, the mix of contracted flying is lower.

Our next question comes from the line of Christopher Stathoulopoulos of SIG.

Jude, just talk about the puts and takes around your operating margins for next year. So we have the maintenance pull forward into 4Q. You've given us a lot of color on how you expect cargo to move. I think December is when you really see that, I think, spooling up or hitting a run rate. Maybe talk to, I guess, for scheduled service, the puts and takes around costs and timing to kind of get back to those pre-Amazon margins. And also on the charter piece, there are some events. The question before, you referenced, I think Soccer World Cup next year, America's 250. So it would seem that there's some opportunity there. So at a high level and really but kind of focused on schedule puts and takes around op margins next year, I guess, net of this maintenance pull forward into the fourth quarter?

Two primary inputs. First is going to be the TRASM continuing to improve in the rate that we've seen. I don't see any reason that, that should change. And then the second one is we should hit an inflection point on unit cost. And that's because we did a deal with our flight attendant union that's effective for this year. We have the final pay increase for our pilots effective this year. We don't have a lot open on labor. And so those rate increases will have good comps, and therefore, also our efficiency initiatives will start to take hold, like I mentioned earlier, PBS and incremental basing. So we should start to see an inflection point. And then you have the lumpiness of our maintenance programs, specifically heavy checks. We don't do engine overhauls here. We buy in lieu and replace in lieu of repair. So that should be pretty constant. Those costs flow through our D&A. We're getting a lot of cost pressure like all airlines from airports. I don't see that abating much. Everybody's massive capital programs just sort of everywhere. So that will continue to pressure us. But I think overall, what we're expecting year-on-year CASM ex to hit kind of a 0, flat level in the middle of next year, late next year and improve from there. So I feel really good about unit cost trends. We should finally start to see the post-COVID inflationary pressures kind of run their course and those to kind of stabilize. I think it's going to be really good. Torque, anything to add on that?

No.

It's so block hour dependent because there is the charter piece that you mentioned that is ad hoc. There's what Amazon is going to do peak season, of course. But do you think for the full year on a per block hour basis that unit costs could be down?

No, because the mix is going to change, right? So it costs a lot more per block hour to fly scheduled service flying because fuel costs and ground handling and all that stuff is in there. So we're going to continue to have pressure on that because we're -- just a segment mix.

Okay. And then as a follow-up on the Visa, I realize it's still early response thus far. And if you could remind us of any remuneration targets you've communicated.

I've mentioned publicly that our credit card program produces about $20 million annually. That would be full implementation of the Synchrony contract. We're on pace. It's going to take us, I don't know, maybe a year to kind of to get the contribution per passenger up to where we want it to be. And then from there, it's just about scaling volumes. So Synchrony has been great. I've been really, really pleased with the technology outlay. Passengers -- I mean, our customers are picking it up really rapidly. So they're transitioning over to the new card. beyond what we expected. Everything is looking green on that program.

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

This is Jake Gunning on for Duane. It looks like you generated very strong free cash flow in the third quarter. Would you consider that normal seasonality? And if not, did the ramp in any other segments maybe contribute on the working capital side?

Let me give you a general comment there. There's a lot of seasonality in our business, and therefore, there's a lot of seasonality in our ATLs. So a lot of our free cash flow by quarter is going to be based on ATL expansion. And as we talked about earlier, we're selling now into our winter peak season with higher volumes and higher fares. So there's a lot of ATL pickup in that. Torque, any other color?

No, I think -- what we're seeing is very strong and the builds are where we expect them to be. So we'll be in good shape.

Great. That makes sense. And then just on the aircraft side, you alluded to it earlier, but are you seeing any movement in used aircraft values for the 737?

No, we haven't done a deal in a long time. It's been pretty brutal. Fortunately, we did a lot of transactions coming out of COVID and buying out subleased aircraft. So to our commentary throughout the whole year, we have a 70 aircraft operation, 50 of those airplanes we own and are on the balance sheet, but 7 of them at the beginning of the year were leased out, and those redeliveries will fund our scheduled service growth, our passenger network growth going into '26 and '27. So we don't have to buy anything, and we can kind of hold the line on price. But it's been tight out there. Boeing was here yesterday. We were talking about their rate increases. I think the NG availability is going to be mostly dependent on MAX production rates. which unfortunately have been slow to kind of pick up. So I mean, we're not sitting on our hands here. We're looking at hundreds of airplanes literally. And right now, owners of airplanes have better options than to take the Jude Bricker price, I guess.

Our next question comes from the line of James Kirby of JPMorgan.

This is actually Jamie Baker filling in for James. So first question is. Yes, it feels a little weird. So just looking at the fourth quarter schedule on the West Coast, it looks like the capacity cuts there are a little bit steeper than the overall domestic average. Anything to read into West Coast fundamentals from that? Or is that just how it played out as you're pivoting more towards cargo?

Not really much to read -- I mean, we talked earlier about -- in past calls about Minneapolis, L.A. being kind of a weak -- weaker market than the rest of our network that kind of continues. But as you look at the West Coast broadly, as we look at it, it also includes Palm Springs, San Diego and San Francisco, Portland and Sea-Tac, which aren't operated in the wintertime. But those Southern Cal markets that aren't L.A. are doing really, really well. Palm Springs in particular, I'd call out. So this is like the leisure market is strong, and there's not a lot of capacity growth, and so it's materializing in higher fares. It looks really good to me.

All right. And then I also had a Boeing question since you brought up the Jude Bricker price Again, I recognize that you guys are not panning the pavement, but you obviously have your ears to the ground. So how would you describe having that with Boeing, where do you think the market is today relative to however you calculate on an age-adjusted basis, the values that you were able to get coming out of COVID? Because from a timing perspective, it does seem like the uplift on MAXs will provide some relief on the used side by the time that you guys are really out there actively shopping around.

Yes, Jamie, possibly -- yes, so indulge me to ramp for a second. We have kind of always looked at an airline has a core bit of like a bucket of parts, right, that are at the end of the life realization. That number has been about $2 million for the airframe and $2 million for each engine. So let's call that $6 million. And then there's the maintenance value that's transferred over from the prior operator from new. And that can be full life to 16 or 0. And then there's an operator premium kind of availability metric. And so all 3 of those metrics kind of go in. Now the residual value, that $6 million has been pretty constant. It's higher than it was during COVID, but it's not out of whack. I mean we're selling airframe, we part out our airframe. We sold it for about, I think, [ $2.75 million, ] something like that, and we sold a couple of cores probably $3.5 million relative to $2 million. So it's up, but it's still kind of, I don't know, ballparkey. Where we've really seen a massive value expansion is in engine maintenance value transfer. And that's because shop visit costs are just through the roof. I mean, probably twice what they were at the bottom of COVID. To give you a sense, we did an engine in the middle of COVID, so we had a lot of leverage. It was $500 a cycle, no monthly fees, nothing like that. We don't usually lease, but they just really wanted this lease to happen. Now when we're valuing engines, the inherent cyclic value is over $1,000, say, $1,100 or so. So that value metric has almost doubled, and that's the largest proportion in the value of a used airplane. So it really has challenged the market.

Our next question comes from the line of Scott Group of Wolfe Research.

This is Ryan Capozzi on for Scott. So just kind of harping on some previously asked questions. But I guess with the reduced scheduled service capacity in MSP, have you seen any degree of backfilling from your competitors in some of your markets?

No. No, we haven't. I mean there's been -- God, I can't even think of a single market that we serve that has capacity increase in the first quarter. I can't think of a single one. No, no, it's been -- it looks really good. I don't have anything else to add.

Okay. No, that's helpful. And then I guess maybe just building off that, right? As you start to add back some of the scheduled service in 2026, just curious kind of what does that capacity growth look like exactly? Is it just adding back frequencies? Or is there any sort of change to the network strategy next year?

Yes. So if we bring fleet utilization, passenger fleet utilization up to 7.5 hours per day on an annualized basis and induct all the leased airplanes to get to 50 aircraft in passenger operation. That operation is about 30% bigger than we are today. So we're going to expand next year into kind of what we had already lost and then we'll expand beyond that. So I mean, what's most important and what I think, really exciting is that, that growth can be realized in peak periods. So we cut down September massively to support cargo growth. Our September scheduled service block hours in 2025 is smaller than it was in 2017 when we had 40% of the fleet. And the reason is there's just not that much opportunity in those periods of time. So when we think about growth, what's exciting is that we can expand because of more aircraft and having a larger cargo operation that buffers peaks and troughs, we can be adding into June, July, August, December and most importantly, March. And that's going to keep -- our growth will pressure naturally unit revenues, but it's not going to -- it's going to be pretty muted because we're going to be focused on peak periods where there's excess demand. And so, it just looks -- it's setting up really nicely for us.

Our next question comes from the line of Catherine O'Brien from Goldman Sachs.

I just was thinking about some of your comments on margins and seasonality you've made over the course of the call as they pertain to the first quarter. Schedules are showing capacity down year-over-year in 1Q. So I'm guessing that will put pressure on margins year-over-year, to your point on taking peak flying down as a margin drag. But you're also talking about a lot of momentum on the demand side. I guess, will the capacity cuts just be too difficult to overcome from a year-over-year margin perspective? Or based on what you're seeing today, understanding that could change on the demand side, do you think you could be potentially setting up for margin expansion? Just any [indiscernible]

Absolutely. No, I want to be super clear. Absolutely. Yes. I mean there's inputs like fuel and all that stuff that's normal. But the maximum impact on our scheduled service was in the third quarter of this year. So it's behind us. So now we're kind of continuing to expand. And we'll be -- as I mentioned, in December, we're fully implement it on our cargo. And then from there, all incremental credit hours will be allocated into sched service growth. And yes, we should be -- I think we're going to have a tailwind into '26. It looks pretty good for [ 4Q. ]

Just to be clear, 1Q margin year-over-year is absolutely comment.

Yes, I get it, we're not ready to guide, but you know how to look at it today. [indiscernible] I'm pretty bullish on 1Q.

Thank you. I'm showing no further questions at this time. I'll now turn it back to Jude Bricker for closing remarks.

Thanks for joining us today. We're really excited about where we are and where we're headed, and we'll talk to you guys in about 90 days. Have a great day.