Porter growing as industry contracts

 - December 31, 2008, 5:24 AM

Canadian regional carrier Porter Airlines has settled quite comfortably into the niche it began carving for itself two years ago, when CEO Robert Deluce finally realized his dream of reopening Toronto City Centre Airport to scheduled airline traffic. Today, Deluce oversees a fleet of eight Bombardier Q400 turboprops flying to  seven destinations within a 500-nm radius of the island airport. Traffic has grown at a steady pace, the airline has turned a profit every month since June last year and by most accounts Porter has delivered on its pledge to do its part to reverse the trend toward bare-bones, no-frills flying on scheduled airlines. But things didn’t look nearly so tranquil between the time Deluce hatched his plan to start the airline in 2002 and the day Porter finally got airborne in October 2006.

Of course, Deluce knew it would take some time and effort for his grand plan to pass muster with the regulatory authorities and, not least of all, the environmental lobby. After all, he originally wanted to build a bridge to the environmentally sensitive island, and community opposition enjoyed some fairly influential backing. Never did Deluce dream, however, that it would take more than four years for the service to finally take off.

Then again, at the time Deluce couldn’t have expected the city council to revoke an approval for the bridge, particularly after the Toronto Port Authority (TPA) had already received federal permits and spent at least C$6 million of the estimated C$48 million needed to complete the project. But soon after mayor David Miller took office in December 2003, the council voted to do just that, prompting Deluce to file a lawsuit against the city that accused the mayor of coercing council members to reverse their positions by threatening to exclude them from key council committees and other posts.

Two years later, Porter settled with the city and unveiled a revised plan to link the island with a new ferry, terminals and related infrastructure, paid for by the Toronto Port Authority. In response, Air Canada said it would reinstate Air Canada Jazz turboprop service from the island to Ottawa and Montreal, using facilities subleased from Stolport. Unfortunately for the Canadian flag carrier, the Toronto Port Authority denied its sublease application, prompting Jazz to file a complaint in federal court, alleging that the authority has discriminated against Air Canada Jazz by granting Porter Airlines a monopoly over the Toronto City Centre Airport market.

Continued Growth
To this day, efforts to encroach on Porter’s effectively exclusive domain at Toronto City Centre by Air Canada Jazz continue in the courts. Meanwhile, at a time other airlines continue to cut capacity, Porter keeps growing. Most recently it converted options on another pair of Q400s, giving it a total of 18 airplanes on firm order, two of which this past fall arrived in time for its November 12 launch of its latest service into the U.S., to Chicago Midway Airport.

Porter, which began flying to Newark International Airport last March, has seen traffic progress to the point where its plans to infiltrate a swath of the U.S. by 2010 looks more like a real possibility than the pipe dream characterized by skeptics. Progress hasn’t been easy, by any means, but Deluce exudes confidence.

Still, “It’s a bit of an uphill battle,” he conceded. “It took us quite a while to get into Newark, so maintaining and preserving our slots has not been easy, but we’re pleased right now that we have seven good return flights a day, and of course some additional weekend coverage, so we’re actually in better shape than we were when we started off at the end of March. And ridership has been good.”

Deluce said he hopes to increase the total number of flights into Newark by three or four more arrivals and departures, raising the total number of daily round trip flights between Newark and Toronto to at least 10 by the spring.

“The main thing–and I don’t think this is a secret to anybody–is that the New York area is congested and in the summer months is busy often with ground delays and flow control. The FAA has been trying to decongest the area to some extent so it was asking operators to cut back on slots, and of course we had just been given our seven return flights so it took a little bit of effort on our part to effectively re-establish not only the seven that we had, but a few extras on the weekend. And we’ve done that and we’re now looking forward to a bit of growth in the spring.”
Working in Deluce’s favor, of course, was the fact that as other airlines cut capacity, parked airplanes, shed employees and saw balance sheets bleed red with rising fuel prices, Porter managed to grab a few slots that might otherwise not have been available. Meanwhile, its fleet of Q400s has allowed it to make money on load factors–according to Deluce–with which virtually any other 70-seat airplane would have lost big.

Providing Value
For now, the Porter business model centers entirely on short-haul premium destinations from Toronto, limited to durations of some two hours. In fact, the flight to Newark gets one-and-a-half hours allocated to its time schedule, although most of
the flights, according to Deluce, take an hour and 15 minutes, including taxi time. So Porter’s main selling point centers on the speed Toronto City Centre offers compared with the ordeal travelers often must endure traveling through the busy and congested Toronto Pearson International Airport.

Other “value added” features include complimentary beer and wine, a premium snack and a 34-inch pitch afforded by the 70-seat cabin configuration in the Q400s. Typically configured in a 78-seat layout, the Q400s used by Porter carry two fewer rows of leather seats than normal, an attribute Deluce considered vital to the kind of service he sought to portray when he hatched the idea for the airline in 2001.
Another “premium” feature involves Porter’s business class lounge at Toronto City Centre, where every passenger–regardless of fare level–gets access to Wi-Fi and computer workstations.

So how has Porter managed to offer all the amenities most other airlines have gone out of their way to strip from their offerings–and make money in the process?
“A lot of the success lies with the choice of aircraft,” said Deluce. “It’s a very fuel-efficient aircraft compared to what our competitors use. As a matter of fact, it saves some 30 to 40 percent in fuel. So particularly in times of increasing fuel prices or at least price volatility, we’re just as mindful as anybody else of the impact that might have on the airline and on the economy. But in actual fact Porter is probably in a better position compared with many of our competing airlines when higher fuel prices are in place because of the lower fuel burn and the wider margin that really happens as you add fuel surcharges and compete in that marketplace.”

So, in effect, according to Deluce, higher fuel prices had become an advantage for Porter. “That’s been the experience to date,” he said. “We just finished our first full year of fiscal profitability, [and] although we don’t publish our results, [Porter being a private company] at the end of August we closed off our year end with a nice net income margin that would probably rank quite well amongst most of the top airlines anywhere.”

Catering primarily to business passengers, Porter has quickly built a reputation on timeliness and efficiency sometimes not associated with past start-up turboprop operations. Of course, the Q400 shares few of the negative characteristics of its aging brethren, with its comparatively quiet cabin and high cruising speed. In fact, the airplane serves as an extension of the modern, yet nostalgic experience Porter has tried to convey–an experience that starts with a two-minute ferry hop across the channel, on to the free 10-minute bus ride to Toronto’s Union Station area, bounded by Bay Street and York Street in the central business district.

“That probably saves you a couple of hours on a typical return trip [as opposed to using Pearson], said Deluce. “It might even save you $50, $60 in cab fare each way.”

And all that could well figure into Porter’s value proposition, particularly for the kind of savvy traveler it tries to attract. The same goes for its choice of Chicago Midway Airport rather than O’Hare, said Deluce. Next on the potential list of U.S. cities ranks Boston, Reagan Washington National, Philadelphia, then perhaps Pittsburgh, Detroit and Cleveland.

“We’ve actually identified 17 or more domestic and trans-border destinations that we feel have the critical mass that would allow us to put in place time-sensitive business schedules and which would also appeal to those traveling on leisure,” said Deluce. Possibilities north of the border include Windsor, Sudbury, Timmons, Sault St. Marie and Thunder Bay. “Those are all places that can certainly handle 70-seat configurations and with enough frequency to satisfy the time-sensitive business traveler,” he added.

By the time Porter adds the various points it has identified as likely targets by early 2010, it will have taken 20 Q400s if all goes according to plan [it holds options on two more], and “likely we will have placed a follow-up order by then,” said Deluce. Registering a 99.7 dispatch reliability rate over the past few months, the airplanes have suffered none of the landing gear problems described by fellow Q400 operator SAS, said the CEO, who continues to monitor the progress of Bombardier’s work on a stretched version of the airplane known as the Q400X.

“It’s possible when some of our markets mature a few more seats would be helpful,” said Deluce. “At the moment we’re dealing with capacity issues by increasing our frequency and we intend to do that in New York and we’ll do that in some of our other markets by spring once we take some more airplanes.”

For now, Ottawa represents the airline’s busiest port of call, generating enough demand to require 10 round trips a day on the 70-seat prop-jets. Next comes Montreal, with nine. Within the next 12 months, Deluce estimates, each of those destinations will require either 14 or 15 flights a day. Although virtually all its traffic involves point-to-point travel, over the summer months and on the weekends the airline runs from Toronto to Ottawa to Halifax–the only one-stop route Porter executes.

All flights run exclusively on the Porter code, although Deluce won’t rule out code-sharing in the future, particularly once Porter’s U.S. network develops some critical mass.

“I wouldn’t say that we wouldn’t have any interest [in code sharing],” said Deluce. “I think it’s just premature for us to get too focused on that at this point in time. There are some modifications that we would make in due course to our Navitaire booking system that will allow code-share and interlining but at this stage it’s probably more important for us to concentrate on the O&D traffic and on connecting over our own system. Eventually we’ll develop relationships with other airlines that will allow us either to connect through Midway or through Newark or through some of the other U.S. gateways.”

For now, most any connecting traffic runs directly over Porter cities, and Deluce expects to see more Ottawa passengers connecting through Toronto on to Chicago Midway. “We’re already getting some connections through to New York, [but] our model itself is based on origin and destination traffic so anything we get beyond O&D traffic is really a bonus,” said Deluce.

“Toronto is pretty much a straight line between Ottawa and Chicago, so a one-stop over Toronto will be quite appealing to some Ottawa originating passengers who have business in Chicago and want the advantage of being able to access the downtown airport in the Chicago end as well.”

As a privately held Canadian company, Porter does not have to publish its load factors, but its yields reflect its character as primarily a business-passenger oriented carrier. Nevertheless, Deluce said load factors on routes such as Ottawa-Halifax ran close to 90 percent over the two or three months leading to September. Still, he said maintaining such high load factors on the Q400 hasn’t proved as vital for his operation as one would think given the efficiency of the airplane and the nature of his business.

“The Q400 is a bit of an anomaly in that you don’t get quite as concerned about load factors,” he said. “There are some operators out there that are profitable with load factors in and around the 30- to 35-percent level…Now I’m not suggesting that that’s our break-even load factor, but you don’t have to be in the 85 percent or even the 75-percent range to be doing very, very well with the 400; it’s just that type of aircraft.”

In terms of ticket pricing, Porter likes to think of itself as “premium short haul,” said Deluce. Its primary competition on most of its routes, Air Canada, offers what it calls its low-end Tango fare, which Porter generally matches with what it calls its Firm fare. Porter matches Air Canada’s mid-range Tango Plus with what it calls its Flexible fare, and the flag carrier’s Latitude fare equates roughly with Porter’s high-end Freedom fare.

“We don’t tend to price lead,” said Deluce. “But we do offer the full gauntlet of fares and passengers generally come away from Porter feeling like they’ve had a good value experience. Today’s passengers are astute enough to know there’s more to it than just the price of the ticket.”