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Alaska Air restructuring Horizon Air subsidiary, dropping its branded business

Alaska Airlines CEO, Bill Ayer
Alaska Airlines CEO, Bill Ayer

In a move that is long overdue, according to analysts, Alaska Air Group is restructuring subsidiary Horizon Air, dropping its branded business in favour of a 100% capacity purchase business model that is more like its peers. Announced in Alaska’s latest investor update filing, the company said that effective 01-Jan-2011, Horizon will shift to a model whereby all of its flying will be performed on behalf of Alaska Airlines under a capacity purchase agreement (CPA). Currently, Horizon operates approximately 43% of its schedule in flying for Alaska.

During the second quarter, branded flying brought in USD100 million of the regional’s USD168 million in passenger revenue. Questions remain about the changes as to whether Alaska is positioning its regional partner for sale, something suggested by analysts three years ago.

“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 the company filing.  “We are currently working on structure and financial presentation and expect to have more information in the coming months.  This change will have no financial impact to Air Group as any payments between Alaska and Horizon will be eliminated in consolidation.”

Despite its contributions, the branded business has remained troubling for the carrier which expanded it when it lost its CPA with Frontier and was stuck with the CRJ 700s it acquired for the Denver-based service. Better to put them to use than have them lay fallow costing millions. Horizon was the only regional remaining after ExpressJet closed its branded service with both branded and CPA operations until Republic bought Frontier which still remains a risky experiment.

The move results from new management at the regional carrier after former CEO Jeff Pinneo retired to be succeeded by Alaska Air Group CFO Glenn Johnson. Johnson was tasked with evaluating the changes necessary to bring Horizon to profitability and, during the last conference call, it was clear that the branded business was in jeopardy.

During the Alaska Air Group 2Q-2010 conference call Johnson spoke of his vision for the regional carrier. “While we are making progress, we can and must achieve a 10% margin,” he said. “For the 12 months ended 30-Jun our margin was 5.1%. To continue closing the gap and accelerating the pace of improvement, the Horizon leadership team is evaluating the current business model to determine how best to go about making Horizon a financial success and what changes may be necessary to accomplish this.” He spoke of possible future expansion into geographic areas that are not traditionally Horizon locales, such as California, Arizona and Mexico.

AAG expects to take charges in the third quarter between USD6 million and USD8 million on the removal of its four remaining CRJ700s from its fleet which are being leased out.

While hinting at outsourcing maintenance during the 2Q conference call, the company announced earlier this month that it would go ahead with its outsourcing plans in its quest for profitability.

See related story: Alaska Air in USD58 million profit, pausing to review operations to drive efficiencies

“We previously announced our decision to outsource the heavy maintenance functions for Horizon Q-400 aircraft,” the company said in its filing. “Heavy maintenance for the CRJ-700 aircraft is already being provided by an outside vendor.  We believe this change will result in approximately USD3 million in cost savings annually.  As a result of this decision, we will be eliminating a number of positions in the maintenance division through either early-out packages or voluntary and involuntary furloughs. We believe these actions will result in an estimated third-quarter charge of less than USD3 million. The forecast of cost per ASM above does not include this charge.” Nor does it include the CRJ 700 charges.”

The move also means that Alaska, as with its legacy counterparts, will be planning the deployment of Horizon’s Q400s, all to support Alaska Airlines operations. The company reported that in July Horizon provided about 95% of the total purchased capacity for Alaska. Horizon yield jumped 10.8% to USD 28.73 cents in July while passenger revenue per available seat mile rose 13.8% to USD 23.77 cents. Capacity was down 2.3% year on year to 126 million ASMs with traffic largely flat, growing only .4% to 104 million revenue passenger miles. Load factor rose 2.3 points to 82.8%.

Horizon forecast that capacity would remain flat in the third quarter at 365 million and grow 5% to 1.4 billion ASMs for the full year. Cost per available seat mile will decline slightly – by 0.5% – in the third quarter when it will be USD 19.3 cents and for the full year when it will be USD 19.5 cents. Advance booked load factors will be up two points in August, one in September and two in October. In July, branded yield rose 7.3% to USD 29.20 cents while RASM also rose 7.3% to USD 24.07 cents.

Horizon posted flat ASMs in July at 296 million on a 1.3% increase in RPMs to 241 million. It flew 1.3% more passenger or 645,000 and system RASM rose 4.3% to USD 21.76 cents. Load factor rose a point to 81.6%. For its branded flying RASM jumped 7.3% to USD 23.56 cents

Alaska’s 3Q expectations

Capacity is expected to rise 7% in the third quarter to 6.5 billion and, for the full year 5% to 24.3 billion. Cost per available seat mile ex fuel and special items for the third quarter and full year will decline between 3% and 4% to between USD7.55-7.65 cents and between USD7.9-8 cents, respectively.

Advance booked load factors rose 1.5 points in August, 2.5 points in September and 4.5 points in October.

Meanwhile, consolidated capacity is expected to jump 5.5% in the third quarter to 7.3 billion and 5% for the full year to between 27.5 billion and 27.6 billion ASMs. Consolidated costs will drop 2-3% in the third quarter to between USD8.4 and 8.5 cents while for the full year the drop will be between 3-4% to USD8.8-8.9 cents.

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