Alaska Airlines and its regional partner, Horizon, announced a revamped business agreement this week. Alaska will now control all of Horizon’s flight planning, marketing, and sales, leaving Horizon to simply operate its flights and ground functions.
At the heart of the change is a switch in how the airlines do business. Previously, 45 percent of Horizon’s business was operated under capacity purchase agreements (CPA), in which Alaska paid Horizon a preset fee for the flight and collected whatever revenue the flight produced. The remaining 55 percent of Horizon’s flights were operated under a revenue sharing agreement.
Under the new arrangement, all of Horizon’s business will use the CPA model. This makes sense for Horizon, because it’s carrying virtually no financial risk. Alaska pays X amount of dollars whether there are five people on the plane or 50. Sure, a revenue sharing model carries more profit potential, but CPA agreements offer far more stability, and allow smaller carriers like Horizon to focus on operations and customer service.
For customers, this means little. Alaska will now determine when and where Horizon flies, but for the time being, the experience will be the same. There are reportedly discussions about rebranding Horizon under Alaska’s flag, which is what typically occurs in CPA situations, but nothing has been decided. Horizon actually has a fairly strong brand in the regions it covers, though it can’t compare to the size and scope of Alaska’s name.
There’s also talk that the agreement may signal a sale in the near future. Brett Snyder, writing for BNET, explains that the move makes Horizon a more tempting acquisition option. “Any acquirer would want a stable stream of revenue,” Snyder writes. “Having half your flights operating with full risk is not something that any other regional wants to think about … So now Horizon has its business set up in a way that makes sense for an acquisition.”
Alaska and Horizon have a pretty strong relationship, of course, but there’s nothing wrong with kicking the tires.