Jetspeed

Horizon adopting all-CPA business model
Aug. 13, 2010

CPA vs. brand

Horizon has long operated under a hybrid business model.

Currently, about 45 percent of Horizon's capacity is operated under a CPA agreement with Alaska. This is the type of arrangement most other regional carriers have with their major airline partners. Alaska keeps the ticket revenue and in turn covers our operating costs (including fuel) and pays us a profit margin.

Routes like Seattle-Yakima and Portland-Redmond qualify as CPA routes primarily because of the high percentage of Alaska connecting traffic they carry. Other CPA routes are those flown in conjunction with, or in place of, Alaska. These include our Portland-Bay Area and Seattle-Reno service, to cite just two examples, where Horizon equipment is better sized to maintain frequency at a lower cost for Alaska, allowing it to deploy its equipment elsewhere.

The other 55 percent of our current capacity is categorized as brand flying. Examples of these routes include Seattle-Boise and Santa Rosa-Los Angeles, which still flow considerable connecting traffic to Alaska but are primarily local markets. Unlike CPA routes, where our profit is guaranteed, brand profits (or losses) are dependent on how well these routes perform financially, which depends on our operating costs and how many people we carry and at what average ticket price.

Starting Jan. 1, Horizon Air will change to an all-CPA (capacity purchase agreement) business model, gaining a stable and predictable revenue source insulated from marketplace risks. Our simpler operating model will focus on providing safe, reliable, cost-effective capacity to Alaska Airlines at a market-based price.

"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," President Glenn Johnson says. "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."

Horizon will remain an airline separate from Alaska and operate under a separate operating certificate, so Alaska will still be obligated by regulations to clearly disclose to customers that Horizon is the operating carrier for flights designated with the AS code. But from an internal financial viewpoint, the flying will be accounted for differently, aligning with how other regional airlines are compensated by their major airline partners. Alaska will determine where, when, and how much Horizon will fly, and buy all the needed capacity under the CPA. Horizon will no longer be financially at risk for filling seats to raise revenue; our focus will be on providing our service as cost effectively as possible.

"This is the road to growth for Horizon, where we all ultimately want to be," Johnson says. "Once we have brought our cost structure in line with market and are clearly on a path toward our ROIC 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."

Related changes

The shift to an all-CPA model will also help remove complexity and duplication between Horizon and Alaska.

A few years ago, Alaska and Horizon combined their Planning and Revenue Management departments into a single shared services group at Alaska to oversee route planning, scheduling, pricing and yield management for both airlines.

Now, Alaska is assuming all remaining marketing, advertising and planning functions, as well as new and existing route analysis and sales for Horizon. This will ensure decisions in these critical areas maximize the return for AAG as a whole.

All affected employees at Horizon were notified yesterday and are being offered positions at Alaska.

What would a new external brand feel like?

Horizon has already operated as a CPA carrier with a different external brand – and very successfully. When Horizon flew as Frontier JetExpress from 2003 to 2007, our Denver-based aircraft sported a variation of Frontier's logo and livery, but it was still clear that Horizon was providing the service. Boarding passengers saw a large decal with "Proudly Operated by Horizon Air" next to the entry door. If Horizon's external brand were to be switched for Alaska's as per the industry norm, the approach would likely be much the same.

"No matter what's painted on our aircraft, we would remain Horizon Air – the same airline with the same culture that we've cultivated and treasured for nearly three decades," President Glenn Johnson says. "You may wear different clothes, but that doesn't change who you are – you're still the same person. Similarly, if Horizon ends up 'wearing' a different livery, it will remain the same special airline it is now and continue to be recognized for all the things that set it apart, including our heart-based, caring service and high reliability."

What's not changing

The all-CPA change is not expected to have any effect on staffing at hub stations Horizon and Alaska share.

"What drives hub staffing is cost competitiveness and productivity," Johnson said in his July 23 Q&A on onyourhorizon.com. "We’ve already consolidated the check-in function at Sea-Tac and PDX. We chose not to consolidate additional functions in the past, because it was more cost effective to have Horizon-staffed gates and ramp at Sea-Tac and PDX. As long as that holds true, there's no reason why it would change."

Another thing that isn't changing – at this time – is Horizon's own marketing identity (or "external brand").

"When we announced the second quarter financial results, I shared with employees that the possibility of replacing Horizon's external brand – that is, logo, livery, uniforms, etc. – was also being considered," Johnson says. “The Alaska brand is better known in most markets, and the industry standard is for CPA carriers to assume the identity of their major airline partner. So, it's still under consideration, but nothing has been decided yet.”

Horizon will also be maintaining its own highly popular Ala Cart planeside baggage service, complimentary inflight beer and wine, and hard liquor and snacks for purchase.

"Something else that isn't changing is the sense of ownership and pride we feel about the high quality of the product we provide," Johnson says. "Even though we won't be marketing the seats themselves, the people in those seats will be there because of the way we at Horizon take special care of them."