2006 Volume 9 Issue 4

Wings of the Great Northwest

Wings of the Great Northwest

Conversation with Jeff Pinneo, President and Chief Executive Officer, Horizon Air

President and CEO of Horizon Air since January 2002, Jeff Pinneo has nearly 30 years of airline industry experience, more than 25 of those years with Horizon Air and Alaska Airlines (part of the same airline group). Beginning in 1990, he served as vice president of Customer Services at Horizon where he oversaw Horizon’s largest division, which included station operations, inflight services, security, and food and beverage service. Prior to joining Horizon, Pinneo served in Alaska Airlines’ marketing department as director of advertising. He was also responsible for the original implementation of Alaska’s frequent flier program, then known as Gold Coast Travel and now called the Alaska Airlines Mileage Plan. A graduate of the University of Washington, Pinneo holds an MBA through the Presidential/Key Executive MBA program at Pepperdine University.

Jeff Pinneo, President and CEO, Horizon Air

How many aircraft of what size does Horizon have?

We have 69 airplanes spread across three distinct fleet types at Horizon. First, we have 20 Q-400s, the 74-seat high speed/high tech turboprop made by Bombardier of Canada. These are very fuel efficient, very customer friendly, and very fast turboprop aircraft that are best in class for cost efficiency. We also have 21 CRJ-700s, the 70-seat regional jets also made by Bombardier. They are high tech, highly efficient regional jets that allow us to provide service to medium sized, longer-haul markets. And then we have 28 Q200s, a 37-seat turboprop also made by Bombardier that allows us to add smaller communities to the Alaska Air Group network.

Where are these planes based?

Our network emanates from Seattle and Portland in support of our position as “Wings of the Great Northwest,” but in reality, we fly them all up and down the West Coast. For example, we have 16 flights a day out of Los Angeles alone to places such as Eugene, Medford, Santa Rosa, Redding, Redmond-Bend, Eureka-Arcata, Reno, Sun Valley, and Boise. Back in the northwest, we fly every half hour between Seattle and Portland and every hour between Seattle and Spokane. All told, we serve nearly 50 cities in the western United States and Canada.

You’ve mentioned “cost efficiency,” how do you measure “unit cost” at the airline?

Our “output” is the “available seat mile,” or “ASM,” which is one airline seat traveling one mile. We track our cost per “ASM” as a key indicator of our relative efficiency. We also measure our revenue per “ASM,” or “RASM.” The goal of course, is to keep our “RASM” higher than our “CASM” [cost per ASM]. The Q400 has been a very effective tool in helping us to maintain this balance.

Recently, we placed an order for 13 additional Q-400’s to further improve the efficiency of our operations and reinforce our presence in our key “backyard” markets in the northwest.

So when you order new planes, I’m assuming you pay some percentage down and the rest on delivery or something like that?

It depends more on whether you finance and, if you do, how you finance your fleet. If you’re Southwest with nearly $3 billion in cash and liquidity on hand and very little debt, you’re likely to simply purchase aircraft outright. Most of the industry relies on debt financings or operating leases, which require equity and good credit respectively.

Alaska Air Group, of which Horizon is an operating subsidiary, has a healthy balance sheet as well with about $1.2 billion in liquidity and debt-to-cap ratios below 70 percent, so we’re hoping to use the balance sheet to directly fund a portion of our capital expenditures, along with some debt financings.

How do we account for Alaska Air Group and Southwest having cash when so many other airlines who’ve been around for a long time are strapped and either in, just out of, or facing bankruptcy?

It’s a long story, but I think it can be summed up in a few phrases: conviction over purposeful missions, people-centric strategies and smart, fiscal conservatism. Since the deregulation of our industry in 1978, both Southwest and Alaska/Horizon have been very clear about their commitments to customers and the regions they serve. Understanding your customers their needs and wants and the requirements of the regions you represent is the starting point to developing defensible competitive positions. From there, recognizing that business is a relational prospect that success is a function of being good at building value-relationships with those who depend on you is essential to building lasting loyalty, which is a key ingredient in any successful business model. Both airlines have been disciplined about reinvesting in their companies and maintaining healthy cash balances which support robust investment in the up-cycles and safe harbors in the downturns.

One of the biggest downturns the airline industry has ever seen followed the events of 9-11. What was Horizon’s unique experience during that time?

While the whole world changed on September 11, the economy was beginning to change dramatically nearly a year prior to that day, and the airline industry was feeling the effects. With the downturn came softened demand, more aggressive fare competition and the yield erosion that accompanied it along with increasing fuel prices. Then the terrorist attack occurred, and the industry was literally grounded for three days. The process of restoring flight schedules began once guidance regarding enhanced aviation security had been handed down from the government, but the restoration of traveler confidence lagged. It especially lagged when it came to short-haul business travel for which acceptable alternatives were readily available.

You may recall at that time passengers experienced great uncertainty about how long it would take them to get to their departure gates. The prospect of waiting up to two hours to get through security to then board a one-hour flight to a destination that you could otherwise drive to in three hours was heavy on many travelers’ minds. The result for us was a drop in our short-haul business travel which was, at the time, the core of our business our short-haul revenues dropped about 40 percent in the months following 9/11. We worked night and day to mitigate the effects, through collaboration with the TSA [Transportation Security Administration], the introduction of express lanes for our shuttle passengers, line wait guarantees you name it. Still, the effects were significant.

Can you compare that scenario to today’s?

Like a lot of things, we’re better off today partly because of all we did to restore the value proposition and partly due to factors, like improvements in the economy, outside our control. One of the primary strategies we employed was to diversify our revenue streams so as not to be so vulnerable to any one line of business or even to any one geography. I would say the short-haul business certainly as a percentage of our overall business is still much less than it was pre-9-11. Now having said that, the security process has been streamlined, with more predictable screening times as the result. In our key markets, we introduced express lanes for our shuttle and elite customers these folks can basically fly right through. We also had to work very hard on ensuring that our core promises to customers our commitments to ontime and reliable service were consistently kept, as any significant delay would call into question a customer’s decision to fly.

What would you say are the weaknesses in the airline industry today?

Where to start [chuckle]? As every business student knows, businesses strive to keep fixed costs low and revenues high and stable in the airline business, we see these factors reversed. Airlines have extremely high fixed costs and very volatile revenue streams. They are very capital intensive, given the need to invest in very expensive aircraft, and historically have generated very low returns on invested capital. On top of that, airlines are very heavily regulated, very heavily taxed, very heavily unionized and entirely dependent on monopoly/oligopoly infrastructures in the form of airports. The burdens on the business are pretty staggering, which is why the industry is in the midst of a dramatic transformation. Through bankruptcies, consolidation and the emergence of new, well-funded low cost carriers, we’re in the process of becoming very different. It’s coming at great cost, but the promise of a healthier, more vibrant industry is the outcome everyone is seeking. At Alaska Air Group, our two companies are very focused on achieving a level of returns that exceed the cost of capital that allow us to compensate investors for their risk and have enough left over to fund our future.

What is going to happen to the price of tickets in future years?

In spite of all the cutbacks and consolidation over the past several years, we still have excess domestic capacity, so price competition is likely to remain a factor in the years ahead. The industry needs to be able to price its services appropriately, but that’s tough to do when you have too many seats chasing too few customers. We’ve seen considerable rationalization of this imbalance in the past few years, but there’s more to happen. So for the foreseeable future, air travel is likely on average to remain a terrific bargain. In the years since the deregulation of the industry in 1978, industry yields (inflation adjusted) are down about 110 percent. Consumers have been the beneficiaries and have adjusted their expectations accordingly. They want value quality and low price and the industry is working to respond.

You have also seen introduced in the last few years simplified pricing structures: five fare levels instead of 30, the removal of restrictions on advance purchases, and the elimination of Saturday night stays. The most recent development is the introduction of one-way only fares. When you buy a ticket now, you can buy a one-way ticket, two-way tickets, or two one-ways added together.

So with simplicity and transparency offered through the web, you can use a shopping engine and get a full look at everybody’s fare structure. You’re going to see that capability bringing downward pressure on fares. At the same time, consolidation and capacity reduction will bring upward pressure on the floor.

How did you come to be President and CEO of Horizon Air?

I certainly had no “master plan,” other than to work hard, enjoy and appreciate every day, and be thankful for the people around me and any good thing that came my way. I’ve been with Alaska and Horizon for 25 years and have only applied for one job my first one. After that, each move was the result of an invitation, which, as a mentor explained to me, was the result of my “interview of life” the one that happens every day, in every meeting, and with every project. I think I’ve tried to live as much in the present as possible and to give and receive as much as there is to exchange in the job along the way. And good things have happened.

I’ve also been very fortunate to have great mentors. I can’t emphasize enough how valuable it is to have the support, encouragement, and counsel of someone who’s a lot further down the trail than you are.

Of course, nothing good would have happened were I not blessed with incredible team members every step of the way.  Somone once said that leaders are granted permission to lead by those who choose to follow.  That’s certainly been true in my case.

Where did your work attitude come from?

A lot of it stems from lessons that my parents instilled in me that were centered on the idea that we owe it to others to give our very best. Through the power of their example, they inspired me to place others’ needs first and to work very hard to leave those you come into contact with better off than you found them. Through them, and later through my faith, I came to know that everything we have is a gift from God, and our greatest achievements are measured in the difference we’re able to make in the lives of others.

You do a lot of visiting with employees to give let’s call it the “human touch” at all levels, from the top down. From that I am inferring that there’s a sense of being appreciated and of recognition within Horizon Air.

This gets at the core of what we believe about business that it’s a relational prospect, and that of all the relationships we’re focused on building, those with our coworkers are really at the top of the list. Senior leadership is responsible for nurturing the environment that enables people to bring their very best to the game. We think this requires us to be clear in communicating the realities we face and quick to recognize the contributions of others. Along the way, we work to serve those who are serving others and to model behaviors that we’d like to see at the center of the customer experience. As human beings, we’re by definition imperfect, and we frequently get it wrong. But on the whole, we’re aspiring to the right things, and working hard to encourage and hold each other accountable to achieving those aspirations.

We have a good friend of our business, Bob Farrell, who founded Farrell’s Ice Cream Parlor. His mom taught him that the three magic words in business are “I’ll be back.” The point of any business plan is to get your constituents to think or say, “I’ll be back.” It’s really a very simple principle, but the magic is in the execution, and in order for it to be “magic,” it needs to be genuine. We present these ideas to our new hires and ask them a few questions: What do those words mean for you today? And why should you care about something like that in the first place?

Our answer is that we think you should care because you’re in the process of writing a book that’s entitled “My Life.” And that book will have a chapter in it that’s titled the same as one in mine: “My Time at Horizon Air.” For whatever length of time that book covers, you have an opportunity now to decide both the content and the quality of your chapter. Wouldn’t it be great to say the following about that chapter: “You know, I recognized the opportunity to receive everything it had to give me. At the same time, I gave it everything I had I left nothing on the table that might have helped someone around me. Years from now, I could take you back there and show you the ‘footprints’ I left how the place is better because I ‘walked’ there.” Wouldn’t that be great? In this way, we try to get our people to focus on what Covey called “the end in mind” to begin with it and to be deliberate and decisive about those steps that will take you and all of us to a good place.

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Author of the article
Wayne L. Strom, PhD
Wayne L. Strom, PhD, is a professor of behavioral science at Pepperdine’s Graziadio School of Business and Management. As an active consultant to executives and organizations, Dr. Strom has worked with a long list of local and multinational corporations in Europe, Asia, and the United States, including ABC-TV, Baxter Healthcare, CB-Richard Ellis, Citicorp, Consolidated Capital, The Culver Studios, SmithKline, Southern California Edison, Toshiba America, the U.S. Department of Agriculture, and Yamaha. His current focus is on leadership processes for corporate renewal and the development of businesses as continuous improvement/learning organizations. He has served as associate dean, director of graduate programs, and chair of various academic committees. In 1986, he founded the Pepperdine Civic Leadership project, and in 1991, he was selected as a Harriet and Charles Luckman Distinguished Teaching Fellow in 1991. Currently he enlists executives in coaching employable but unemployed and homeless men and women for job searching skills.
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