Dangerous Year Expected for Horizon

Again posting disappointing results and being described as a drag on parent-company Alaska Air Group's (AAG) results, Horizon and Alaska said they are evaluating the Horizon fleet perhaps to shed the high-cost Bombardier CJR-700s in favor of Q400s this year. Horizon is already shedding its Dash 8s, some of...

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Again posting disappointing results and being described as a drag on parent-company Alaska Air Group's (AAG) results, Horizon and Alaska said they are evaluating the Horizon fleet perhaps to shed the high-cost Bombardier CJR-700s in favor of Q400s this year. Horizon is already shedding its Dash 8s, some of which it sold to CommutAir. Alaska also said that, in addition to reducing the CRJ fleet, it is also considering farming out a portion of its capacity purchase routes to a third party with larger, more efficient equipment.
“The Q400 has the potential to improve the economics of part of the flying now being done with CRJs,” said Horizon CEO Jeff Pinneo. “Consequently, we are looking at the economic benefits of further simplifying to a single fleet type which may outweigh the benefits and flexibility of a mixed fleet.” Regionals are reporting that fuel prices are making regional jet economics problematic.
“It was a tough year for Horizon and our capacity purchase performance did not meet expectations,” said Alaska CFO Brad Tildon, reiterating it would not put Horizon on the market because the regional was an integral part of Alaska Air Group in both flow and harmonization markets. “Capacity purchase flying fell short of expenses by about $8.8 million in the quarter and $21 million for the year.” Alaska’s capacity purchase revenues reached $71.9 million in Q4, up from $3.4 million in the year-ago period. For the year, it grew from $16.4 million in 2006 to $281.4 million. However, capacity purchase expenses grew from $3.2 million in Q406 to $80.7 million and for the year from $14.3 million in 2006 to $302.8 million.
Tilden also reported that revenues from its flow markets – those in which passengers connect to the mainline – are nearing costs but revenues in harmonization markets – local markets – are falling far short of costs, forcing the airline to consider reducing fleet types and farming out routes. While the RJs are being used to replace mainline equipment that can be used more profitably elsewhere, the two airlines are looking at all options to reduce costs at the regional. Currently the airline has 20 long-term CRJ 700s, plus one on a short-term lease that will be shed this year. Twelve of the 20 are in its Horizon capacity purchase routes. ASMs are expected to grow only one percent in the first quarter.
Pinneo said adjusted pre-tax revenues jumped 14.5 percent to $23 million on 10 percent growth in system capacity while the adjusted pre-tax loss was $19.5 million for the year compared to a profit of $20.3 million, in 2006. Excluding market-to-market fuel hedge accounting adjustments, Horizon's pretax loss was $11.2 million for the quarter, compared to a profit of $500,000 in the fourth quarter of 2006.
He cited extraordinary costs for fleet simplification in which it up-gauged its Q200s to Q400s and redeployed CRJs to long-haul competitive markets. He also cited high fuel and highly competitive fares in its branded markets for the dramatic changes in its profit and loss statement. Contributing to this was $16 million in increased maintenance expenses which are expected to decline by $20 million for engine overhauls and $6 million for further Q200 retirements. Also contributing was the challenge of integrating the CRJ 700s into its home markets, which brought with them additional expenses in fuel and other items, once covered under the Frontier Jet Express contract. In addition, it traded a low cost per available mile (CASM) and revenue per available seat mile (RASM) environment under the Frontier program for a higher CASM and RASM in its capacity purchase and branded markets.
“We feel a sense of urgency for making changes,” Pinneo told investors last week, adding that changes imposed during 2007 – a simplified fare structure and fleet as well as changes to its business model were necessary and laid the groundwork for future success.
Approximately half of its revenue increase is from its branded flying which, with ASM growth of 30 percent, produced a load factor that declined four points. Combined with a 7.7 percent yield decline, these factors conspired to lower RASM by 13.7 percent which was offset by a 13.4 percent decline in branded CASM ex fuel, said Pinneo.
ASMs dedicated to its Alaska capacity purchase agreement increased 40 percent also resulting from the up-gauging and CRJ deployments, designed to maximize returns and minimized losses at Alaska. About 61 percent of capacity is assigned to branded flying with the remaining flown for Alaska.
Adjusted operating costs increased $30 million, up 18.9 percent, $18 million of which was fuel related as consumption increased because of the loss of the FL program. It also incurred $3.5 million in Q200 fleet transition costs and $4 million in non-fuel CRJ transition costs. It also incurred $5 million related to the Q400 landing gear inspections. Despite all this, CASM ex fuel was lower by almost one percent and down by 3.2 percent if fleet transition charges were excluded. Fleet simplification was a major driver during the last year. Eleven Q200s were shed from its fleet, while 13 Q400s joined the fleet. It plans to shed another 17 Q200s to make way for the 15 Q400s on order.
Pinneo noted that early indications are promising in efforts begun last year with fleet simplification. “We expected RASM to decline and CASM to decline more leading to higher unit profitability on capacity growth,” he said. “For 2008, we are focusing on areas where expenses are high and improvements are highly leveraged across the organization. On the revenue side, we are targeting market-specific RASM improvements in addition to growing revenues in cargo and contract services.” Capacity will decrease four percent this year with the return of a CRJ700 and outsourcing of the Q200s. It is also reducing Boise and Spokane flying as part of its cost reductions in order to support AAG network missions out of Seattle.
Horizon Air's combined passenger traffic from both branded and capacity purchase flying in the fourth quarter increased 9.7 percent on a 10.3 percent capacity increase. Load factor declined by 0.4 percentage points to 72.6 percent. Horizon's combined operating revenue per ASM increased 3.9 percent and its operating costs per ASM excluding fuel decreased 0.8 percent.
Alaska Air Group, Inc. reported full year net income of $125.0 million, or $3.09 per diluted share, compared to a net loss of $52.6 million, or $1.39 per share, in 2006. The prior year results include charges related to the transition to an all-Boeing 737 fleet at Alaska Airlines and for voluntary severance programs related to new labor contracts. Both periods include adjustments resulting from mark-to-market fuel hedge accounting. Excluding the impact of these items, the company would have reported net income of $92.3 million, or $2.28 per diluted share, compared to net income of $137.7 million, or $3.45 per diluted share, in 2006.
The company reported fourth quarter net income of $7.4 million, or $0.19 per diluted share, compared to a net loss of $11.6 million, or $0.29 per share, in 2006. Both periods include mark-to-market fuel hedge accounting adjustments and 2006 includes a favorable adjustment related to the voluntary severance programs. Excluding the impact of these adjustments, the company would have reported a fourth quarter net loss of $17.9 million, or $0.46 per share, compared to a net loss of $3.4 million, or $0.08 per share, in 2006.
Horizon will have 10 Dash 8s, 36 Q400s and 20 CRJs, according to the current plan for year-end 2008, shedding six Dash 8s and a CRJ 700 as well as adding three Q400s. However, its results have forced a complete re-examination of not only its fleet but its operations, the results of which will unfold throughout the year. Capital expenditures for Horizon are forecast at $105 million.