Horizon Air’s President on Future Growth and Outsourcing (Across the Aisle Interview)

And we’re back. Today, I pick up my interview with Horizon Air President Glenn Johnson by talking about future growth and Alaska’s recent decision to outsource some flying to SkyWest. [Read Part 1 of the interview]

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Cranky: Looking at Horizon now compared to a couple years ago, you look a lot more like any other regional carrier other than the fact Across the Aisle From Horizon Airthat you’re owned by Alaska Air Group. Is this foreshadowing a possibility of doing flying for other airlines?

Glenn: Yeah, I wouldn’t rule that out. Right now our focus is on getting our transition to the all-Q400 fleet and getting our profitability to the level of Alaska’s. You know, Alaska has just achieved its 10 percent goal for return on invested capital, and that’s the goal for Horizon as well. We’re halfway there. When we get to that level, I think we would be competitive in terms of being able to go out and look for other business if that was in the interest of [Alaska] Air Group to have us do that.

Cranky: And you don’t have many competitors flying Q400s.

Glenn: And I think the Q400 is a great airplane in the right markets. Obviously it doesn’t compete on real long haul markets. With the number of seats it has and the incredible fuel efficiency, it’s a fabulous competitive tool for us.

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Cranky: Looking at the Alaska network, there’s really limited growth opportunity for that airplane. You’ve talked about going into the State of Alaska, but other than that, do you see real growth opportunity with Alaska’s network?

Glenn: We’ve actually just recently introduced service from San Jose to Los Angeles. It’s an interesting one for us to watch because it’s an intra-California marketplace … obviously a competitive marketplace but also pretty well-suited from my perspective for the Q400 so I think there’s lots of opportunities once we get the cost structure right at the company.

Cranky: That market is interesting as well because you’re going up against one of your codeshare partners too. I was waiting to see if we’d see some American regional jets disappear in favor of the Q400 at some point.

[silence]

Cranky: Probably not gonna comment on that, I guess. [laughs]

Glenn: [laughs] Nope. I’ll leave that one alone.

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Cranky: What about the Alaska flying? Are you talking about that at all yet?

Glenn: We haven’t announced anything other than what we’ve said on the [earnings] call which is that we are actively looking to see if the Q400 has a place doing State of Alaska flying from a technical standpoint and from a community standpoint as well. If you think about the State of Alaska flying, and my last job was as the CFO for [Alaska] Air Group so I have some insight into this, we need to figure out the right mix of flying where we can still handle the right mix of cargo and passengers. At the end of the day, the Q400 on the right stage length has better economics than a 737. That can allow us to provide service more efficiently and produce lower fares. That’s what customers want these days.

Cranky: Are there are any tech issues with the Q400 up there?

Glenn: It kind of depends on which cities and that’s why we’re looking across the whole range. Alaska pioneered the [Head-up Guidance] system and we have that, so as far as low visibility flying we’re fine. And Alaska pioneered [Required Navigation Performance] RNP flying, particularly for the Juneau Airport which is quite tricky. Horizon has work to do to get to the same level of RNP certification at each airport. That’s what I mean when I talk about technical issues.

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Cranky: Switching gears, as a Long Beach resident I was wondering how you would continue to serve Long Beach when the CRJ-700s are retired. I see there’s an agreement with SkyWest to take some of your Horizon Air President Glenn JohnsonCRJ-700s. I imagine that’s making some people nervous at Horizon.

Glenn: We haven’t talked about specific city pairs but all along as we’ve talked about simplifying down to a single fleet type with Q400 flying, there are some markets that we are serving on behalf of Alaska on the CRJ that are not great candidates for a Q400. You could probably technically do Pacific Northwest to Southern California routes with a Q400 but it adds 20 to 25 minutes time and so that’s probably not ideal. Alaska is still working on specifics on which markets. It’s just 5 airplanes.

And you’re right, the Horizon employees are concerned about the impact of that and my reminder to the employee group is that we’re very competitive with the Q400. We’ll become even more competitive when we get through the rest of the business transformation process – getting to a single fleet type, getting the rest of the reliability and cost issues with the Q400 taken care of. At the end of the day I think the Q400 becomes a competitive advantage for us in the right size market against anybody else.

Cranky: I assume there is some anxiety around which routes will be taken over, but I’m sure they’re nervous saying, “can this grow any further? Will it take routes away from us?”

Glenn: The best way to not have that happen is for us to have really competitive costs so we can produce seats for Alaska at the best costs possible within the family.

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Cranky: Is there any discussion about Alaska Air Group spinning off Horizon into a separate company? Sell it to a larger regional?

Glenn: We’ve said that no, we acquired Horizon (I say “we” because I was at [Alaska] Air Group) with the intent of having that feed owned within the Air Group. Horizon has an important place within [Alaska] Air Group. The challenge for Horizon until recently has been they were producing all that feed but not generating adequate return on the $750m of capital on the Horizon side of the business – about 25% of total capital of [Alaska] Air Group. The board was rightly concerned; we certainly couldn’t invest more capital in the Horizon side of the business with no return on it, and even with the existing capital, we had to get it to generate an adequate return.

For the year 2009, we generated 5% return on invested capital at Horizon and 11.2% for Alaska so Horizon is moving along. We were in the 1 to 2% prior to that in terms of return on invested capital on the Horizon side. We’re moving pretty swiftly ahead. We just have to keep focus on that and we can get to 10% return and then we can look at additional investments for Horizon. But absolutely the stated intent is to keep Horizon within the Air Group and have it be an important feed provider for Alaska.


24 Responses to Horizon Air’s President on Future Growth and Outsourcing (Across the Aisle Interview)

  1. Pingback: Tweets that mention Horizon Air’s President on Future Growth and Outsourcing (Across the Aisle Interview) - >> The Cranky Flier -- Topsy.com

  2. If/when they start in Alaska they will have no problem getting people to fly on a turbo since most flying in Alaska is on small aircraft and it will give Alaska a bigger strong hold on the state since the turbos will be able to go where 737’s can’t.

    • AKflyer says:

      QX will [likely] not add any communities not already served by mainline. The likely outcome will be a few Q400’s in ANC to fly ANC-FAI and maybe BET for starters – and to go head to head with the non-codeshare ERA flights. Incresed frequency – and better number of seats to meet actual demand. I would however bet that some MVP’s and Golds would not be too pleased to see an aircraft that doesn’t come with the chance of those freebie upgrades they salivate over when available.

  3. Smaller aircraft are definitely the thing in Alaska, allows for you to get close to points in Alaska that you otherwise would not see. I particularly like the trip the Fair-weather mountains; that is amazing.

  4. Smaller aircraft are definitely the thing in Alaska, though bumpy flights, they allow for you to get close to points in Alaska that you otherwise would not see. I particularly like the trip the Fair-weather mountains; that is amazing.

  5. chad says:

    This summer Horizon blogged about how much more fuel efficient this turboprop is compared to jets and that passengers like being down at low altitudes with the storms and bumps. Now Alaska is, in effect, still going to fly the same aircraft but let a different company do it. What will become of the employees that built Horizon? Why did the ex-CFO for Alaska join the ranks at Horizon as president, just to dismantle its fleet to only a hand full of airplanes. The economy on on a slow upswing, but horizon seems to go the other way.

    • Ken says:

      You make it sound like Horizon is going away. They aren’t. They are just consolidating to one aircraft type (like Alaska did). Horizon is one the largest operators of the Q400 in the world. Plus I think they are only growing their Q400 fleet and expanding the type of routes flown (like mentioned to Mexico and Alaska).

    • Chad, from what I’ve heard its not unusual for office staff to move between Alaska Airlines, Alaska Air Group, and Horizon.

  6. chad says:

    Just bundle up the few turboprops that Horizon has with the American Eagle fleet. That will greatly increase the value for selling Eagle. Eagle’s fleet size would increase but, what, 2%.

    • Ryan says:

      This post proves you know nothing about how airlines or companies operate. Good luck just rolling up those airplanes into another company.

    • Sanjeev M says:

      Umm…………………

      AA operates a few ATR’s. You should at least have a glance at wikipedia before saying that. Unless you know something about an Alaska-AA merger that we don’t………

  7. Vernon Pellman says:

    What a joke!

  8. lisa says:

    why doesn’t anyone speak the truth…..and why do you write in this strange format that undermines your employees?

  9. Pete says:

    What Mr. Johnson fails to include with his numbers, is the fact that many millions in profits were earned by Horizon but put in Alaska’s coffers, as there is a “capacity purchase agreement” between the two companies. Horizon will get paid a set amount for flights, no matter how many passengers are on board. Any excess goes straight to Alaska.
    If those millions were put where they came from, Horizon would be well above the stated goal of 10% return on invested capital. This seems to be nothing more than a way for Mr. Johnson to justify extreme cost cutting measures at Horizon, when none are warranted. Unfortunately, it seems they are determined to, in any way they can, justify Horizon’s demise, disregarding the long standing valuable synergy that has existed between the two sister companies. Case in point: Alaska Air Group fared very well post 9/11 compared to any airline, with the possible exception of Southwest. I contribute this relative success largely in part to the synergy between Alaska and Horizon. They had the flexibility to move flying between the companies as needed to meet rising and falling demand.
    I’m left scratching my head trying to figure out what caused this attempt to restructure Horizon when, at least in my opinion, there is no need to.

    • Fred says:

      To me, this doesn’t seem to be such a big restructuring, but rather repainting the Q400s and getting rid of the CRJs. With the capacity purchase agreement in place and staying that way, the profits are still going to go to Alaska where they did before. If anything, there will be even more flexibility between Alaska and Horizon now.
      The only real big “extreme cost cutting measure” would be getting rid of the CRJs, which makes a lot of sense. (Although I don’t think that outsourcing to SkyWest is the best solution; either 737-700s or Q400s should be able to cover all the remaining Horizon CRJ routes.)

  10. maxe says:

    And why, one asks, is there a need to show the man in the “across the aisle from Horizon Air” cartoon with a cigarette in his hand?

    • That’s the across the isle logo where it’s from only Cranky knows.

    • CF says:

      This comes up every time. It’s because I love smoking and think everyone should do it. Or not. Actually, it’s just an old-school safety card image that looks awesome. So I use it. And that’s it.

      (FWIW, I’ve never even smoked a cigarette in my life.)

  11. Jerron says:

    Its funny pete, since no one knows how the outcome for the CPA flying will turn out. Simply because IT JUST STARTED ON 01JAN2011 so you cant go saying that the CPA flying has lost Horizon money or gained a lower ROIC. Cause there are no results from that agreement yet!

    • Well horizon has been flying many routes under a CPA for years (I think it was a 60/40 split.). There has to be some internal accounting guide that’s used to determine what Alaska “pays” Horizon for the flight.

      If anything this decision was probably made because it was noted that Alaska was more efficient at marketing than Horizon was. I’ll bet before Horizon went 100% CPA the CPA flights were more profitable than Horizon’s at risk flying.

    • Pete says:

      No, you are incorrect, Jerron. Horizon going ALL cpa started on Jan 1, but a good part of Horizon’s flying were already cpa prior to that. Check the annual results:
      Alaska Airlines had a Purchased Capacity Income of 332.5M, and Purchased Capacity Costs of 298.9M, so a gross income from CPA of 33.6M. Guess where most of that money came from? That’s right. Horizon Air. If you don’t believe me, check the Annual Earnings report for yourself. It was released on January 25.

  12. chad says:

    Just sell it and put everyone out of their jobs. Maybe Republic would want some more Q400’s. Then Skywest could CPA all of the Alaska flying. Now that would be efficient and cheap, and Horizon employees could apply for those positions. Go ahead Alaska and send over more golden parachute boys to dismantle this great regional.

  13. Jim says:

    Amen to what Chad said. Sad to see a once great regional that had such potential to do something different, simply fall in line with the the dog eat dog world of CPA flying. Sad. Very sad.

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