Traditionally, wholly owned regional airlines provide dedicated code-sharing service to their mainline partner, feeding the majority of their traffic into that carrier at its hubs. Horizon Air is not your traditional regional carrier.

Although wholly owned by Alaska Air Group (NYSE:ALK), Horizon also operates code-share agreements with Northwest (NasdaqNM:NWAC) and Continental (NYSE:CAL) and has a market agreement with American (NYSE:AAL). Instead of being a primary feed to Alaska Airlines at that carrier's hubs, Horizon mostly flies point-to-point service throughout the Northwest - from the state of Washington north into Canada, south to California and Arizona and west to Montana and Utah. And roughly 65 percent of its traffic is origin and destination (O&D), with only 35 percent connecting to Alaska and the rest to its other marketing partners.

Horizon was created in September 1981 by Milt Kuolt, a Seattle-based entrepreneur. Unhappy with the two airlines serving small communities out of Seattle, Kuolt formed a group of investors, acquired two 40-seat Fokker F-27s and started service from Seattle to Yakima and Pasco, Wash.

A year later, the group bought Air Oregon, inheriting its destinations in Oregon as well as its fleet of Fairchild Metroliners. This gave it service to most of the communities within Washington and Oregon, according to Patrick Zachwieja, Horizon's vice president of marketing and planning.

In 1983 Kuolt bought Transwestern Airlines in Logan, Utah, serving points in Idaho and Utah. "It also continued to take on more F-27s and Metroliners," Zachwieja said. The airline also acquired its first Fokker F-28s in 1984, becoming one of the first regional airlines to operate jets. In 1985 Horizon began ordering DeHavilland Dash 8s to replace the F-27s, eliminating them from the fleet by 1988.

Kuolt took the airline public in 1984 with a highly successful initial stock offering of 750,000 shares. This money was used to retire debt and provide funding for additional aircraft acquisition.

Horizon's success quickly drew the attention of Alaska Air Group. In 1986, it was acquired by the group, becoming a sister carrier to Alaska Airlines. Horizon had signed a code-share agreement with United Airlines (OTC BB:UALAQ.OB) two years prior to being bought by Alaska Air Group. After the purchase, it dropped the code-share agreement with United and came under Alaska's AS code.

Horizon, however, retained its independence, having its own management structure and running its own show. It has its own sales and marketing division and operates its own reservation system. It also flies under its own brand.

Horizon does use Alaska Airlines for some operations, such as revenue accounting, and it recently turned revenue management over to Alaska Airlines, Zachwieja said. "As we looked at our network from an Air Group perspective, we thought we were leaving quite a bit of money on the table by optimizing on revenue from individual O&D routes versus the Air Group network. So this is our attempt to maximize revenue on an Air Group level," he said. Horizon reports its own profit and loss (P&L) statement, accounting for about 20 percent of the revenue of the two carriers. While it doesn't produce its own annual report, "we have space in the Alaska annual report as a separate callout," Zachwieja said.

Horizon also turned over its tour product, Horizon Holidays, to Alaska. "We merged that with Alaska since they have a wider spread than we do. We just pay them a fee for this marketing," Zachwieja said.

Although both Horizon and Alaska lost money in the first quarter of 2003, the group is expecting to get things turned around in the near future. "We have a very strong cash position and somewhere within a reasonable period of time we will be profitable again as an Air Group," he said.

Most of the airline's traffic is short haul, and its two major markets - Washington and Oregon - "lead the nation in unemployment." So the need is to find some way to diversify the revenue stream. "We're in discussions about doing some fixed-fee flying for carriers other than Alaska. We're currently looking at working with some carriers that we fly for now as well as some we don't. Several carriers have sent out RFPs [requests for proposals] to a wide range of regional airlines, and we are participating in some of those," Zachwieja said.

The airline is growing at around 8 percent per year, "and we hope to stay at that clip over the next several years," he added. Horizon currently has 59 aircraft, of which 16 are CRJ700s, with two more scheduled for delivery this year. An additional six are planned for delivery in each of the next two years. "The problem with our current delivery stream is that it shoves a lot of growth into 2004 and 2005, and we want to keep more of a steady stream over the next several years of around 7 to 8 percent, if possible."

Horizon is currently looking over the order for those last 12 aircraft, "whether they need to be CRJ700s or Q400s or whether we want to stretch out the delivery stream a bit further," he said. The airline is currently in discussions with Bombardier. "We hope to make an announcement within the next few weeks as to our plans for 2004 through 2008."

The airline took delivery of its first CRJ700 in 2001 as a replacement for the F-28s that were becoming expensive to maintain and didn't have the range Horizon needed to develop new markets. "As of February we were out of the F-28s," Zachwieja said.

Horizon's fleet today is a mix of turboprops and fanjets, with 28 37-seat Bombardier Q200s and 15 70-seat Q400s along with the CRJ700s. Zachwieja said that the plan was to go directly into the larger CRJ700 rather than the 50-seat CRJ200. "We knew we couldn't get the CRJ700s any earlier, so we looked at the Q400. We ordered 15 of those, which arrived around the same time as the CRJ700s." The Q400s were put on the higher density short-haul routes of about 500 miles or less. Because it held off ordering regional jets until it could get the larger CRJ, Horizon was the North American launch customer for the CRJ700. "We're also the North American launch customer for the Q400," he said.

Despite some initial concern about customer acceptance of the Q400 turboprop, "from the customers' point of view, it has been very well received," Zachwieja said. "It's roomy, with a 33-inch seat pitch, it's comfortable and it's fast. It's the best ride in our fleet today." He also noted that the Q400 goes head-to-head with Southwest Airlines (NYSE:LUV) in some markets that are 250 to 300 miles, and does well.

Traffic at Horizon tends to be seasonal, with the highest utilization during the summer time and spring and fall being the soft periods. During the winter, the peak markets are either skiing or "sun destinations such as California or Arizona, so we are able to reallocate some flying to those." Capacity is cut back during the spring and fall, which is when the heavy maintenance is done. "We time our [maintenance] checks so we don't have aircraft down in the summer."

Horizon established a large maintenance base in Portland, Ore., three years ago to allow all maintenance to be done in-house, including "C" checks. Since the aircraft are three years old or less, "we haven't had to do any "D" checks. But we will have the capability of doing "D" checks in-house," Zachwieja said. The maintenance facility was designed to handle a 100-aircraft fleet, "so we have a little ways to go yet."

Pilot training is done in Seattle, using flight simulators at FlightSafety International.

Future growth plans call for more point-to-point flying, such as a new route to be introduced July 1 from Seattle and Portland to Santa Barbara, Calif.

"Historically, to get from Santa Barbara to Seattle, you had to go through San Francisco on United," Zachwieja said. "Now we're offering an alternative. For the same price, you can fly non-stop. Bookings are going very well and are exceeding our expectations. So we'll be deploying aircraft that way over the next couple of years. Our strategy is to offer more and more destinations out of Seattle, which is the main point of operations for both Horizon and Alaska. So Santa Barbara is a case in point, and our customers get the advantage of our network once they get to Seattle."

Horizon Air

19521 Pacific Highway Seattle, Wash.
206-241-6757
http://www.horizonair.com

CEO/President: Jeffrey Pinneo
Sr. VP-Operations: Tom Gerharter
VPMarketing/Planning: Patrick Zachwieja
VP-Flight Operations: Daniel Scott
VP-Finance: Rudi Schmidt

Fleet:

Dash 8-200 - 28
Q400s - 15
CRJ700s - 16

2002 Figures:

RPMs - 1.514 bil
ASMs - 2.428 bil
LF - 62.4%
Passenger - 4.815 mil