When Alaska Air Group was discussing its earnings last month, Glenn Johnson, the newly-appointed president of regional carrier Horizon Air, shared his vision for the airline to help it reach its goal of a 10% return on invested capital (ROIC).
It appears that Johnson isn’t wasting any time on making some of the moves he mentioned during the call.
For one, Horizon has decided to outsource all of its heavy maintenance on the Q400 fleet, a move that is expected to save $3 million per year. Now, a carrier outsourcing maintenance is nothing new, but it shows Horizon management means business. (On the bright side, none of the 109 workers affected by the move were laid off and instead took an early retirement package or found employment elsewhere at Horizon or the outsourcing company.)
A bigger move is that Horizon is switching to an all-capacity purchase agreement (CPA) model. CPA flying made up 57% of Horizon’s capacity in July. Under this set-up, Alaska covers all of Horizon’s operating costs (including fuel) and then provides a predetermined profit margin to boot. The rest of Horizon’s network is “brand” flying. Here Horizon is flying at-risk – they keep all the revenues but pay all of their costs, and they’ll get some extra revenue under a pro-rate agreement if someone connects to Alaska mainline.
So why go CPA? It provides Horizon with a much more predictable revenues. I doubt this will change the airline’s route network a whole bunch, since Alaska and Horizon’s route planning functions have already been combined. And financially, this probably won’t change the results of Alaska Air Group in aggregate all that much as it’s just moving some items between Alaska and Horizon.
But going all-CPA makes Horizon more of a traditional regional carrier. And something that would even further that is the future of the Horizon brand name – something that the airline has said publicly is up for debate. Most regional carriers just adopt the branding of the mainline partner – the operator of the flight is only mentioned occasionally.
Meanwhile, Horizon operates in its own colors and has its own special offerings – like free beer and wine.
So it seems that Horizon is headed down the path to be like any other regional carrier – but the brand decision is what really defines the airline’s future. Either way, Horizon will be a regional carrier focused on safe and reliable flights, but its name could become much more hidden from passengers.
The standardization on the Q400 is a weak link in Horizon’s strategy. Some markets are too thin to support 76-seat planes, but are needed to provide connections for Alaska. They need a smaller plane for those markets. The capital costs and operating costs are lower for a smaller plane.
I have to agree w/ Carl, they should have kept a few of the Q200s that they divested themselves with. I am OK with dropping the RJs though.
So Horizon is now just more of Alaska’s biotch. Johnson doesn’t seem to have much of a job anymore as Horizon is now linearly structured to compete in the future. Yeah its safe for Horizon but why enforce artificial constraints on your business?
Is it really true that all of their “affected” staff were taken care of that well? Would be rare in this industry. I’d be interested in learning more about that.