Alaska Airlines and Horizon Air 2007 Annual Report Download - page 130

fleet to begin the required landing gear
inspections. The AD was produced in the wake of
two landing gear failure incidents involving
Scandinavian Airlines (SAS) in Europe. Horizon,
which has operated the Canadian-manufactured
Q400 since 2001, has never experienced any
issues like those encountered by SAS in these
incidents. The inspections were completed over
a 13-day period and the aircraft were put back
into service after that time.
Labor Costs and Negotiations
We are pleased with the long-term contracts that
have been reached with the majority of our labor
groups. We are now in the process of negotiating
new contracts with pilots at both Alaska and
Horizon and with flight attendants at Horizon. The
contract with Alaska’s pilots became amendable
May 1, 2007, and the contract with Horizon’s
pilots became amendable September 12, 2006.
We hope to reach negotiated agreements with
each of these groups that recognize the
important contributions that they make to both of
our airlines, without harming either company’s
competitive position. Factoring in pay rates,
productivity measures, pension, and post-
retirement medical benefits, we believe our pilot
unit costs are among the highest in the industry
for the size of aircraft operated.
We do not know what the final outcome of these
negotiations will be or when agreements will be
reached. However, uncertainty around open
contracts could be a distraction to some
employees, reduce employee engagement in our
business, and hinder us from achieving the
operational goals (such as on-time and
completion-rate targets) that we have set.
Alaska Fleet Transition
During the first quarter of 2006, we announced
our plan to retire our entire MD-80 fleet by the
end of 2008 as part of Alaska’s move to an
all-Boeing 737 fleet. We believe this transition,
when completed, will provide more than $130
million in annual operating savings by way of
lower fuel, maintenance, and training costs.
During 2007, we sold all 20 of our owned
operating MD-80s. The majority of these aircraft
are now leased from the buyer under short-term
lease arrangements, which will allow us to
maintain our current MD-80 retirement schedule
through December 2008. We ceased operation
of seven of these leased MD-80s in 2007,
including one at the end of December that was
earlier than anticipated. The charge associated
with the early retirement in December 2007 was
not material.
We currently have long-term lease arrangements
on four MD-80 aircraft that we plan to cease
operating before the end of the lease term. We
anticipate that once these aircraft have been
removed from operation, we will dispose of them
through a lease buy-out or a sublease
arrangement, or we will store them at a long-term
storage facility. It is likely that we will record a
charge in our statement of operations if either of
these events occurs. Aggregate minimum lease
payments for these four aircraft through the end
of their lease terms total approximately $68.5
million as of December 31, 2007.
Horizon Fleet Transition
In 2006, Horizon entered into an agreement to
sublease 16 of its Bombardier Q200 aircraft to a
third party. During 2007, 11 aircraft were
transferred, resulting in a loss on the sublease
arrangement of $14.1 million that is reflected as
“Fleet transition costs – Horizon” in the
consolidated statements of operations. We
expect the average loss per aircraft to be
approximately $1.4 million, which will be
recorded as each aircraft leaves the fleet.
In April 2007, Horizon announced an order for 15
additional Q400 aircraft, with options for 20
more. These aircraft will be delivered in 2008
and 2009. With this order, we plan to phase out
the remaining leased Q200 aircraft by the end of
2009, and we are in the process of negotiating
transactions that would allow for their exit from
the fleet. We believe the market has improved
since the earlier Q200 sublease transaction, but
the amount or timing of any potential loss or gain
cannot be reasonably estimated at this time.
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