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Regional service provider Horizon Airlines is making a big change in its business model that will turn over decision-making for all of its routes—and the responsibility and risk for marketing and selling seats for them—to sister company Alaska Airlines.
The decision comes with benefits for Horizon but also is generating some questions about its future direction, some of which cannot be immediately answered.
What is definitive is that as of Jan. 1, all of Horizon’s capacity will operate under capacity purchase agreements (CPA) with Alaska. That compares to about 45% of its capacity right now. Under the CPA—as with CPAs between independent regional airlines and their airline partners—Alaska keeps the ticket revenue, pays a fixed fee to Horizon and covers Horizon’s fuel costs and other operating costs.
As Horizon explains it, routes such as Seattle-Yakima, Wash., already operate under CPAs because of the high percentage of Alaska Airlines connecting traffic that they carry. CPAs also are used for service such as flights from Portland to the San Francisco Bay area, for which Horizon aircraft are better sized to maintain flight frequency at a lower cost than Alaska aircraft, it says.
But the rest of Horizon’s capacity is on “brand flying,” for which Horizon decides the routes, does the marketing and bears all of the revenue risk; that means there is no guarantee that Horizon will make a profit on the routes. Examples include Seattle-Boise, Idaho, and Santa Rosa-Los Angeles, which flow connecting traffic to Alaska Airlines but are primarily local markets, Horizon says. Horizon receives a pro-rate of joint fares on itineraries that include an Alaska connection.
Horizon has been able to do this profitably: In the second quarter of 2010, its $8.2-million profit was its best second-quarter result since 2006. But Alaska Air Group wants both Alaska Airlines and Horizon to make at least a 10% return on invested capital; in the second quarter, Horizon’s return was just over 5%.
During Alaska Air Group’s second-quarter earnings call in July, new Horizon President Glenn Johnson said Horizon would be evaluating its business model and considering “a change in the mix” between CPA and brand flying. Now that decision has been made, and it is to go all the way.
In communications to employees about the change, Johnson said an all-CPA model will give Horizon “a stable and predictable revenue source insulated from marketplace risks,” while Horizon focuses solely on providing safe, reliable, cost-effective service. Horizon will remain under a separate operating certificate, but Alaska will determine where, when and how much Horizon will fly.
“This is the road to growth for Horizon, where we all ultimately want to be,” Johnson told employees. “Once we have brought our cost structure in line with market and are clearly on a path toward our [return on invested capital] goal, we’ll be better positioned to make the case for obtaining more aircraft in order to do more CPA flying for Alaska and potentially other airlines.”
Toward that cost-efficiency end, Horizon decided earlier this month to outsource heavy maintenance to Empire Aerospace. It also is trying to finalize a new contract with its pilots, having recently reached an agreement in principle after years of negotiations, and is moving Horizon’s systems operations control center from Portland, Ore., to Seattle to be next to Alaska’s SOC.
Horizon also is continuing to look for buyers for its CRJ-700 regional jets, so it can complete its transition to an all-Bombardier Q400 turboprop fleet. Many questions remain. One is the future of Horizon as a separate brand; Johnson says that question is "still under consideration." As for the future of certain routes; Horizon says no changes are expected for now, beyond those already announced for the winter schedule.
On online forums for pilots and other aviation professionals and afficionados, there has been some speculation about whether Alaska Air Group is positioning Horizon to be sold, or setting the stage for signing CPAs with independent regional carriers. But Horizon is not responding to such speculation right now.
QX Changes Business Model
The decision comes with benefits for Horizon but also is generating some questions about its future direction, some of which cannot be immediately answered.
What is definitive is that as of Jan. 1, all of Horizon’s capacity will operate under capacity purchase agreements (CPA) with Alaska. That compares to about 45% of its capacity right now. Under the CPA—as with CPAs between independent regional airlines and their airline partners—Alaska keeps the ticket revenue, pays a fixed fee to Horizon and covers Horizon’s fuel costs and other operating costs.
As Horizon explains it, routes such as Seattle-Yakima, Wash., already operate under CPAs because of the high percentage of Alaska Airlines connecting traffic that they carry. CPAs also are used for service such as flights from Portland to the San Francisco Bay area, for which Horizon aircraft are better sized to maintain flight frequency at a lower cost than Alaska aircraft, it says.
But the rest of Horizon’s capacity is on “brand flying,” for which Horizon decides the routes, does the marketing and bears all of the revenue risk; that means there is no guarantee that Horizon will make a profit on the routes. Examples include Seattle-Boise, Idaho, and Santa Rosa-Los Angeles, which flow connecting traffic to Alaska Airlines but are primarily local markets, Horizon says. Horizon receives a pro-rate of joint fares on itineraries that include an Alaska connection.
Horizon has been able to do this profitably: In the second quarter of 2010, its $8.2-million profit was its best second-quarter result since 2006. But Alaska Air Group wants both Alaska Airlines and Horizon to make at least a 10% return on invested capital; in the second quarter, Horizon’s return was just over 5%.
During Alaska Air Group’s second-quarter earnings call in July, new Horizon President Glenn Johnson said Horizon would be evaluating its business model and considering “a change in the mix” between CPA and brand flying. Now that decision has been made, and it is to go all the way.
In communications to employees about the change, Johnson said an all-CPA model will give Horizon “a stable and predictable revenue source insulated from marketplace risks,” while Horizon focuses solely on providing safe, reliable, cost-effective service. Horizon will remain under a separate operating certificate, but Alaska will determine where, when and how much Horizon will fly.
“This is the road to growth for Horizon, where we all ultimately want to be,” Johnson told employees. “Once we have brought our cost structure in line with market and are clearly on a path toward our [return on invested capital] goal, we’ll be better positioned to make the case for obtaining more aircraft in order to do more CPA flying for Alaska and potentially other airlines.”
Toward that cost-efficiency end, Horizon decided earlier this month to outsource heavy maintenance to Empire Aerospace. It also is trying to finalize a new contract with its pilots, having recently reached an agreement in principle after years of negotiations, and is moving Horizon’s systems operations control center from Portland, Ore., to Seattle to be next to Alaska’s SOC.
Horizon also is continuing to look for buyers for its CRJ-700 regional jets, so it can complete its transition to an all-Bombardier Q400 turboprop fleet. Many questions remain. One is the future of Horizon as a separate brand; Johnson says that question is "still under consideration." As for the future of certain routes; Horizon says no changes are expected for now, beyond those already announced for the winter schedule.
On online forums for pilots and other aviation professionals and afficionados, there has been some speculation about whether Alaska Air Group is positioning Horizon to be sold, or setting the stage for signing CPAs with independent regional carriers. But Horizon is not responding to such speculation right now.
QX Changes Business Model
