Seattle-based Horizon Air will end all its so-called “branded” flying under a plan to move to a 100-percent capacity purchase agreement (CPA) model starting January 1. As a result, Alaska Air Group’s other subsidiary, Alaska Airlines, will assume complete responsibility for managing Horizon’s route network, along with all the risk associated with marketing and selling seats on the airline’s fleet of Bombardier Q400 turboprops and CRJ700s.
Today, only about 43 percent of Horizon’s schedule falls under a CPA with Alaska. Under that agreement, Alaska pays a fee to Horizon for each departure it completes, pays for Horizon’s fuel and covers various operating costs.
Routes such as Seattle-Yakima, Wash., and Portland-Redmond, Ore., already qualify as CPA routes primarily because of the high percentage of Alaska connecting traffic they carry. Meanwhile, Horizon flies other CPA routes in conjunction with, or in place of, Alaska. They include Portland-San Francisco and Seattle-Reno, where Horizon’s smaller equipment serves to maintain frequency at a lower cost for Alaska, allowing it to deploy its equipment elsewhere.
Examples of Horizon’s brand flying include Seattle-Boise and Santa Rosa-Los Angeles, which flow “considerable” connecting traffic to Alaska but carry primarily local traffic.
“We believe this change in structure will align Horizon with other regional carriers in the industry and will remove complexity and duplication between Horizon and Alaska,” said Alaska Air Group in an August 19 SEC filing. “We are currently working on structure and financial presentation and expect to have more information in the coming months.”
Horizon now flies a fleet of 40 Bombardier Q400 turboprops and 13 Bombardier CRJ700 regional jets. At one point operating 20 of the 70-seat jets, it has tried to lease or sell the CRJs for the past two years, but, according to a Horizon spokesperson, tough economic times have curtailed the effort. Still, it has managed to “remarket” three of the airplanes to South African Express and four to Atlantic Southeast Airlines.
The Horizon spokesperson emphasized that under the planned new arrangement with Alaska, Horizon will convert markets now classified internally as “brand” to the CPA model, not discontinue them. In fact, the airline has already published its winter schedule and all the markets Horizon serves today remain on the schedule post-January 1.
“I’ve been sharing with everyone these past weeks that it’s been clear for a while that Horizon’s business model no longer worked, as is evident from the financial results,” said Horizon president Glenn Johnson. “We needed to find a way to move financial performance into the ‘win’ column alongside all of our other successes, such as safety, reliability and customer satisfaction. I’m now convinced shifting to an all-CPA model will do that and help us achieve our 10-percent ROIC [return on invested capital] target. And it will let us focus on what we are best at–operating a safe and reliable airline while providing top-notch customer service in the air and on the ground.”
During the second quarter Horizon posted a 5.1-percent ROIC.
“This is the road to growth for Horizon, where we all ultimately want to be,” Johnson continued. “Once we have brought our cost structure in line with the market and are clearly on a path toward our ROIC goal, we’ll be better positioned to make the case for obtaining more aircraft to do more CPA flying for Alaska and potentially other airlines.”
Johnson, who replaced the now retired Jeff Pinneo as president over the summer, said the airline harbors no immediate plans to change its brand identity, although such a move “is being considered.” In any case, Horizon will remain an airline separate from parent Alaska Airlines and fly under a separate operating certificate. However, Alaska will determine where, when and how much Horizon will fly, and buy all its needed regional capacity under the CPA. As a result, Horizon will no longer assume any risk for filling seats to raise revenue. “Our focus will be on providing our service as cost effectively as possible,” said Johnson.