NORTH BAY BUSINESS JOURNAL EVENT

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September 25, 2008, 5:30-7:30 p.m., Doubletree Hotel, Rohnert Park

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As officials lobby for flights, $100 oil raises its head

HORIZON SERVICE RUNNING AT 80 PERCENT CAPACITY; WILL SUCCESS DRAW OTHERS?

NORTH BAY – Since the return of commercial air service to the North Bay in March, more than 80,000 passengers have flown in and out of Charles M. Schulz-Sonoma County Airport. The success of Horizon Air’s service to Los Angeles, Seattle and Portland has left the airport and users of the service eager for more.

“We keep asking, ‘When can you do more, when can you do Vegas, when can you do a second Seattle flight?’” said airport Manager Jon Stout.

The airport is also talking to other carriers.

It has a proposal in to Frontier Airlines for flights between Santa Rosa and Denver. The proposal was a response to Frontier’s announcement that it will more than double its regional jet fleet with 12 new planes, and it is seeking new markets.

But skyrocketing fuel prices are causing airlines to take a harder look at expansion plans. Patrick Zachwieja, a former Horizon executive who helped establish the new Sonoma County flights before leaving for Frontier, said higher costs could affect the growth of new routes.

“Like all other airlines, we are evaluating the impact of $100 per barrel oil,” Mr. Zachwieja, vice president of market planning for Frontier, wrote in an email. “This will certainly have an effect. We just do not know the degree.”

Crude oil prices, which largely dictate the price of jet fuel, have increased by more than 65 percent since the beginning of 2007. Fuel is the largest single expense for most air carriers, representing an average 25 percent of an airline’s budget, according to John Heimlich, chief economist for the Air Transport Association, an airline industry group.

“Labor was always number one until the last two years,” Mr. Heimlich said.

Earlier this month, Frontier announced that in response to increasing costs, it will discontinue flights from Memphis to Las Vegas, Ft. Lauderdale and Orlando, in addition to a number of flights from the U.S. and vacation destinations in Mexico and Canada. The airline will add the extra planes to its existing routes in and out of Denver.

United Airlines announced this month that it may ground up to 100 planes next year due to high oil prices, and the CEO of Continental Airlines said his company is “reconsidering [its] growth rate for next year” for the same reason.

“There’s nothing about higher fuel prices that leads you to higher service,” Mr. Heimlich said. “It makes you generally pickier about the markets you can serve.”

While higher costs are dampening airlines’ growth plans, they do not necessarily spell the death of expanded service for Sonoma County, according to industry experts. Airlines that have cut service on weak routes or ordered new planes could be looking to deploy the extra capacity to more profitable destinations.

“If the aircraft were ordered in 2002 or 2003, it’s not like airlines aren’t going to take delivery of them now because of oil prices,” said Doug Abbey, managing partner of the Velocity Group, an aviation consulting company based in Washington, D.C.

So far, the performance of Horizon’s Sonoma County flights appears strong. The average monthly load factor for the flights was nearly 80 percent from April to October, compared with an airline average of about 75 percent for the same period. The load factor is the percentage of seats that are filled with paying passengers.

Sonoma County airport has already heard from Horizon that it may gain access to an additional aircraft if the airline cuts service elsewhere, according to Mr. Stout. And as recently as Oct. 26, Horizon gave Sonoma County a vote of confidence by adding a new flight to Portland and a third daily flight to Los Angeles.

In addition, some regional airlines are expanding despite higher fuel costs. ExpressJet Airlines announced last week that it is launching about a half-dozen new routes, most of which include cities in California.

Frontier is not backing away from its plans to add new aircraft and is likely to announce new regional jet routes in the middle of 2008, according to spokesman Joe Hodas.

“With fuel being in the nineties, I think every airline including Frontier will further scrutinize each route within the system,” Mr. Hodas said. “In the long run, does this affect expansion? It could, on a case by case basis, but it is not a widespread or sweeping denouncement of any plans.”

In the meantime, Sonoma County airport is moving forward with plans for a $20 million project to expand its runway to make it useable by larger aircraft.

“We are doing this based on our discussions with the airlines,” Mr. Stout said.

A master plan for the project will go before the Sonoma County Board of Supervisors next month, and then it will undergo an environmental review, which is expected to take two years.

In two years, “the board can decide whether to continue with the runway extension based on the conditions at that time,” Mr. Stout said.

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