Alaska Airlines and Horizon Air 2007 Annual Report Download - page 131

In 2007, Horizon posted a pretax loss of $10.6
million. We have a number of initiatives
underway to improve Horizon’s operating results,
including evaluating whether further fleet
simplification of Horizon’s fleet away from
regional jets to an all-Q400 fleet would be
beneficial. However, no decisions have been
made at this time.
Capacity Purchase Agreements
Alaska and Horizon entered into a Capacity
Purchase Agreement (CPA) effective January 1,
2007, whereby Alaska purchases capacity on
certain routes (“capacity purchase markets”)
from Horizon as specified by the agreement. This
agreement has resulted in a new presentation in
Alaska’s statement of operations. The actual
passenger revenue from the capacity purchase
markets is identified as “Passenger revenue –
purchased capacity” and the associated costs
are identified as “Purchased capacity costs.”
Alaska also has a similar arrangement in place
with a third-party carrier for flying between
Anchorage and Dutch Harbor, Alaska.
Historically, the revenue from this arrangement
was presented in “Other revenue – net” and the
associated costs were in “Contracted services”
in Alaska’s statement of operations. Now, all of
these revenues and costs are presented with the
Horizon purchased capacity revenues and costs,
and the prior period has been reclassified to
conform to the current presentation.
Alaska and Horizon entered into the CPA in order
to improve the visibility of both the revenues and
the costs of flying in the capacity purchase
markets. Under the CPA, Alaska pays Horizon a
contractual amount for the purchased capacity in
the incentive markets regardless of the revenue
collected on those flights. The amount paid to
Horizon is generally based on Horizon’s operating
costs plus a margin. Alaska bears the inventory
and revenue risk in those markets. Accordingly,
Alaska records the related passenger revenue.
Alaska records payments to Horizon in
“Purchased capacity costs.” Horizon records the
payment from Alaska as “Passenger revenue.”
The Air Group planning department works to
strategically deploy certain Horizon aircraft by
optimizing the balance of local and “flow” traffic
connections with Alaska in order to maximize total
returns to the Company and to allow Alaska to
deploy its larger jets to other routes. Prior to
2007, there was a revenue-sharing arrangement
in place whereby Alaska made a payment to
Horizon if certain covered markets created losses
for Horizon. Alternatively, Horizon made a payment
to Alaska if those markets were profitable.
Under both the revenue-sharing arrangement that
was previously in place and the new CPA, the
payments made from Alaska to Horizon are
eliminated in consolidation and do not impact Air
Group’s consolidated results.
Frontier JetExpress
In November 2007, Horizon discontinued its
contract flying with Frontier Airlines as Frontier
JetExpress. We had nine CRJ-700 aircraft
dedicated to this program, all of which have
returned to Horizon’s operating fleet. Two of
these aircraft were returned in the first quarter,
one in the third quarter and the remaining six in
the fourth quarter of 2007. We have used these
aircraft for productive and strategic
redeployments throughout Horizon’s network and
in capacity purchase markets with Alaska.
However, the influx of new capacity has
depressed yields in some of our markets.
Line of Credit Modification
In April 2007, we announced the Second
Amendment of the March 25, 2005, $160
million variable-rate credit facility with a
syndicate of financial institutions. The terms of
the Second Amendment provide that any
borrowings will be secured by either aircraft or
cash collateral. The Second Amendment:
(i) increased the size of the facility to $185
million; (ii) improved the collateral advance rates
for certain aircraft; (iii) extended the agreement
by two years with a maturity date of March 31,
2010; and (iv) repriced the credit facility to
reflect current market rates. We currently have
no immediate plans to borrow using this credit
facility. In July 2007, we executed the Third
Amendment to the credit facility, which amended
a covenant restriction to allow borrowings
between Alaska Airlines and its affiliates of up to
$500 million, from $300 million previously.
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ŠForm 10-K