Horizon CEO Jeff Pinneo said bidding on the Frontier (FRNT) contract business did not fit in with the company's strategic plans when he reported Horizon posted a $15.1 million adjusted pre-tax profit for the third quarter, up 4.9 percent over last year. He said winning the Frontier bid would mean a $500 billion investment which, the airline felt, could be better used elsewhere.

Pinneo said Horizon remains bullish on contract flying but only as it fits in with the strategic plans of the native network and is aligned with the company's capabilities and strategies. It has bid on outstanding RFPs, including one calling for use of its Q400s, which is more in line with its interests and is complementary to the core business of Alaska and its native airline service. He indicated that, while Frontier and Horizon are going their separate ways, it has gained solid operational knowledge and has proven its ability to provide a consistent, quality product.

"Our competitive advantage is the excellence of our operation," said Pinneo in responding to a question concerning the advantages and disadvantages Horizon has in the fee-for- departure market. "We have a good track record with Frontier, we've made our incentive payments in every period. We are the sole Q400 operator in [the U.S.]. The disadvantages include the fact that certain line items in the cost structure are higher than our peer group but that is a key driver in reducing our costs. He also noted the abundance of 50- seat RJs on the market, forces a downward pressure on pricing those aircraft.

As for the nine CRJ-700s coming out of the Frontier JetExpress operation, they will be reintegrated into Horizon slowly over the next 14 months and would be used to address the "tremendous pent-up demand in meeting the needs of current markets which are underserved and have ultra high load factors." They will be used to fill in key scheduled gaps in the Alaska network. Two will come back in the first quarter with the next one not scheduled to return until September 2007.

He called the financial results more gratifying when considering it comes at a time when it experienced a 21 percent increase in raw fuel costs and a 45 percent increase in maintenance expense driven by engine overhaul timings.

Horizon experienced record traffic levels during the quarter with load factors reaching a new high of 75.9 percent. Pinneo pointed to operational pressures including new security measures imposed during the period which increased checked baggage volumes by 50 percent. He said the impact was deteriorated operational and baggage handling performance with consequent higher costs. In addition, Horizon experienced a short-term booking away by business travelers and last-minute flyers. Despite that, Horizon experience its two busiest weeks in terms of load factor during the period, largely from "backfilling by leisure travelers." It is now back to normal.

Horizon boarded 4.4 percent more passengers than the year-ago period on stage lengths that were 1.2 percent longer on average. It experienced a revenue per mile gain of 5.7 percent. This increase, largely owing to an eight percent increase in ticket prices, resulted in a 15 percent increase in revenue or $22.6 million. Adjusted gross operating expenses were also up - 17 percent or $23.1 million with $7 million attributed to the engine overhaul and another $7.8 million to fuel.

On a unit basis, revenue per available seat mile (RASM) and cost per available seat mile (CASM) rose by 9.9 percent and 8.4 percent respectively, on ASMs that rose by 4.4 percent. Pinneo attributed the RASM increase to the strong pricing environment in the airline's native markets and solid demand.

"Looking ahead, we're not counting on this to continue," he told investors, as recent fare sales in response to seasonal softening demand are impacting yields.

The yield for Horizon was similar to its parent company, Alaska, up 9.6 percent in July, 10.2 percent in August and 6.4% in September for an increase of 8.8 percent for the quarter. The yield changes blended changes from both its own network and the Frontier JetExpress operation. He indicated that in September, in particular, the decline in year- over-year yield improved more on its native network.

Turning to expenses, he indicated fuel, maintenance and wages were the major contributors to a 17% or $23.1 million increase in adjusted operating expenses. Maintenance expenses increased $5.3 million owing to a higher number of planned heavy checks and a scheduled increase in engine overhaul activity.

Wages and benefits were up by $2.6 million, or 6%, on a 5.6% increase in FTEs and a 4.2% increase in the average wage rate. The airline also paid a $1.1 million increase in expense for employee incentive pay in the payouts made to its Operational Performance Reward program.

The airline will take 13 new Q400s in the next year, including two in December of this year and 11 in 2007. Also in 2007, it will begin subleasing the first 12 of 16 Q200s to CommutAir, both in an effort to improve cost efficiency. It plans on replacing the Q200s with Q400s on several routes beginning January 28 to Kamloops and Kelowna, British Columbia as well as Bellingham, Wash, on March 18 and Pasco and Victoria, B.C. on April 8. The Kamloops and Kelowna services are seasonal and revert to Q200s after the ski season.

Pinneo projected capacity growth at six percent for the fourth quarter, seven percent for the full year and 10 percent for 2007. CASM ex-fuel for the fourth quarter is projected at 14.7 cents, up slightly from previous statements, but for the full year it is projected to be on target at 14.2 cents.