SkyWest Airlines has reached an agreement with Alaska Airlines to operate five of the Bombardier CRJ700s exiting the fleet of Alaska's regional unit Horizon Air.

As part of a delayed plan to transition to an all Bombardier Q400 fleet, Horizon Air will finally be phasing out its remaining 13 CRJ700s during the first half of this year. During a conference call today Horizon and Alaska Airlines executives told analysts that all 13 of these CRJ700s will be leased or subleased to other US regional carriers, including five which will remain in the Alaska network and be operated by SkyWest.

Alaska Airlines president Brad Tilden says SkyWest will operate the five CRJ700s primarily on routes between California and Pacific Northwest. These routes are currently served with Horizon CRJ700s but Tilden explains they are too long for Q400s and too thin to be up-gauged to Alaska mainline Boeing 737s.

Alaska executives say the carrier is entering into a capacity purchase agreement with SkyWest for the operation of these five aircraft. They explain the agreement has a "fully industry standard structure" and gives SkyWest a guaranteed profit margin which is similar to the margins provided by other contracts in the US regional airline industry.

Currently all of Alaska's regional capacity in the mainland US is provided by Horizon. As of the beginning of this month, all Horizon capacity comes under a capacity purchase agreement with its sister company.

SkyWest will become a second regional partner providing feed to Alaska under the capacity purchase model. As part of the new agreement with Alaska, SkyWest has agreed to sublease five CRJ700s from Alaska/Horizon for five to six years.

Alaska executives say the sublease terms match the outstanding time remaining in the leases at Horizon. The aircraft will move over from Horizon to SkyWest as they exit the Horizon fleet.

Horizon first unveiled plans in 2008 to shed its CRJ700s and transition to an all-turboprop fleet consisting of Q400s. Originally Horizon planned to phase out its CRJ700s by the end of 2009 but this plan has been delayed multiple times due to difficulties remarketing the regional jets in the challenging economic environment.

Horizon has now finally found homes for its 13 remaining CRJ700s and will phase out its last regional jet in June. Alaska CFO Brandon Pedersen says charges of up to $3 million per aircraft will be incurred as the regional jets exit Horizon's fleet.

While Horizon's last five CRJ700s will be flown by SkyWest for Alaska, executives at Alaska acknowledge that Horizon's other eight remaining CRJ700s will end up in the networks of other US majors. At Horizon, these eight CRJ700s will be replaced this year with eight new Q400s, giving the carrier a fleet of 48 Q400s.

As a result of the upcoming fleet changes, Horizon's net fleet will decrease from 53 to 48 aircraft. Pedersen told analysts that Alaska Air Group will not grow Horizon "until we think we are achieving appropriate returns for that business".

He says Horizon's financial performance improved by about $10 million in 2010 compared to 2009 but Horizon still needs to further work at reducing its cost base before it is in a position where it can again pursue expansion.

Earlier today Alaska Air Group announced Horizon will be retiring its public brand. Alaska executives say this was a difficult decision but necessary as the company wanted to present a unified brand to its customers and financially Horizon was not successful enough under its previous business model.

Horizon Air president Glenn Johnson says the airline will now begin the process of changing its livery and signs to reflect Alaska's Eskimo logo. He says this process will take "12 plus months".

While Horizon's brand will eventually go away, the carrier will continue to retain its own operators' certificate and union agreements. Alaska chief executive Bill Ayer says selling Horizon is not an option being considered.

"It's a real asset for the air group," Ayer says, adding the executive team still thinks "Horizon fits in" with the group's overall strategy.

Source: Air Transport Intelligence news