Charting Porter's Flight Plan
Exploring the potential strategic runways for Porter to evolve into a national player
Since 2006, Porter Airlines (Porter) has been sticking it to the big guys; now it’s looking to become one. Porter is seeking to grow the 2.5 million passengers it carried in 2012 with its downtown Toronto hub, and expand beyond its convenience-focused value proposition. The airline currently owns 85% of the landing slots at Toronto’s downtown Billy Bishop airport (Billy Bishop), and is now hoping to fund an expansion of the airport, increasing the number of runways, and allowing the airline to offer connections across North America. The airline is hungry for growth, having added six planes to its fleet and forming new partnerships with other airlines for connecting flights in the last two years. Porter must be prepared to explore a number of strategic alternatives to evolve from a regional and niche player to a national competitor, some of which are contingent on the government’s approval of the Billy Bishop expansion.
Cleared for Takeoff?
Porter is a differentiated niche player that has developed somewhat of a cult following. It prides itself on simplicity; providing convenience at competitive prices. Porter reduces costs strategically, by using one aircraft type, one-class service, and a single base where it owns a majority of the landing rights. By focusing on one type of service offering, for business professionals, Porter has achieved the lowest breakeven load factor of Canada’s airlines at 49% (larger carriers breakeven closer to 80%). The Billy Bishop expansion is management’s ideal catalyst for growth. Porter wants to continue utilizing its strong position supported by its landing rights, recognized brand, and customer perception.
The economic benefits of the expansion would be shared with Toronto; cities such as Washington DC have similarly used downtown airports to effectively spur economic growth, relieve major hubs, and offer relevant connections from the heart of the city. Instead of building a new airport or transit infrastructure from scratch, the City Centre expansion opportunity might help Toronto’s economy take off.
Porter’s CS100 jets would put many new markets within range in the case of expansion. Out of the 13 prospective routes, only two (West Palm Beach and San Francisco) have a single carrier offering flights from Toronto via Air Canada. The rest of the potential routes present multiple options for customers, but may still have room for more players. The idea behind Porter’s proposed expansion is to better compete with Air Canada and WestJet; providing new and existing customers with the options they want while flying outside Eastern Canada or the
Northeastern US. The most attractive routes will be those that provide Porter passengers with the most travel options, by providing flights to major hubs. It is a strategy that Porter has already tried through interline agreements with Icelandair (via St. John’s), Singapore Airlines (via Newark) and South African Airways (via Washington DC). An expansion to the Western seaboard cities would provide Porter customers with the opportunity to travel directly from downtown Toronto to various destinations across the Pacific coast.
Turbulence in Flight
Canada’s mainline carriers will without a doubt try to replicate Porter’s route and fleet expansions. One way they can go about this is to acquire landing slots at Billy Bishop airport, thereby increasing service and competition from downtown Toronto. Should Air Canada or WestJet acquire further landing slots at Billy Bishop – which is unlikely since the next round of bidding is not planned for the foreseeable future – they would still need to acquire CS100 aircrafts in order to fly medium-haul routes. The proposed expansion and exemption to the jet ban will only apply to these aircraft, which neither Air Canada nor WestJet plan to purchase.
A more likely alternative for the mainline carriers is to partner with the Union Pearson Express, which will be completed in late 2015. A tremendous amount of economic and political capital has already been deployed to build the 25-minute direct train service from downtown Toronto to Pearson Airport. However, the
time to the airport is only one facet of the convenience sought by travelers: the smaller Billy Bishop airport will still offer a more seamless and efficient process from airport to airplane. Nonetheless, with a comparable travel time to Porter’s Billy Bishop location, it is imperative that Porter focus on the in-flight services that differentiate it from its competitors. Service extensions could include in-flight WiFi, much like Southwest Airlines’ recent offering, a significant value-add for its target market of business professionals. With a low breakeven load factor, Porter has room to reduce profit margins in order to erect a defensible value proposition against the competitive convenience introduced once the Union Pearson Express is completed.
A Safe Landing
If the City of Toronto approves the Billy Bishop Expansion, Porter first needs to determine the most profitable routes based on its unique customer segments and corresponding competition. San Francisco, Los Angeles, and Vancouver seem to carry the most opportunity based on the criteria appealing to business customers, the lower competitive threat, and the available interlining opportunities, all while not sacrificing the convenience aspect that Porter prides itself on. Porter also needs to negotiate to ensure the Toronto Port Authority does not raise landing fees if the expansion is approved. Finally, it must counter competitive reaction from Air Canada, WestJet, and other potential entrants to the Billy Bishop hub by creating distinct differentiating in-flight services to solidify its position as business friendly, efficient travel.
In Case of Emergency…
Under the scenario that Porter’s proposal to expand the Billy Bishop airport fails, it will likely have to choose between the lesser of two evils; either an IPO or an acquisition. Porter has previously explored the possibility of going public to raise funds for fleet expansion, but then decided to use internal funding. As it stands, the IPO option still remains a viable opportunity to raise the required funds. In this scenario, investors would have a poor perception of Porter’s growth and expansion opportunities. However, an avenue Porter could pursue is to function as a dividend stock buoyed by steady cash flows. An IPO would provide Porter with the funding to explore potential value adding investments such as the aforementioned addition of in-flight services. The failed expansion would place Porter in a position where its focus would be to defend its value proposition, widen its profit margin, and grow its dividend payout. An expansion into Pearson Airport would be ill advised, as its identity as the downtown, chic, and efficient airline would be lost. Pursuing an IPO will likely come at depressed valuations if done on the tail end of an unfavourable ruling, and places Porter in a fragile position with few strategic options to expand.
Many analysts have been pointing to Porter’s recent bold moves as a sign that it is simply setting itself up for acquisition. In the past, Wardair did just that: it announced significant fleet and route expansions leading to an acquisition by a wary Air Canada before it could execute. Many say that Wardair didn’t have the resources to follow through on the expansion, and it was just a tactic to pressure Air Canada into making the acquisition. The difference with Porter though, is that it does have the assets and resources to compete.
The acquisition route still offers multiple benefits for Porter. It provides growth from multiple centres, resources for fleet expansion, and strategic direction from an entity that has already grown from regional to national.
Currently, there are three sets of potential acquirers: a Canadian chartered airline like Air Transat, a foreign airline looking to gain access to the Toronto business travel market (most likely from the US), or a major Canadian airline like Air Canada or WestJet. It is unlikely that a Canadian charter airline would look to acquire a scheduled service operator such as Porter simply because of the strategic and operational differences between the two models. Porter is also too small to make a significant difference to a potential US acquirer’s bottom line. Further issues with the Investment Canada Act and antitrust rulings would work against foreign acquirers. This leaves a major Canadian Airline as the most likely acquisition source.
Both Air Canada and WestJet would be very interested in the opportunity to acquire Porter. Not only does it remove the threat of an additional mainline competitor nationwide, it provides the acquirer airline with a highly profitable hub in downtown Toronto, which meshes well with Air Canada Express or WestJet Encore. Moreover, neither WestJet nor Air Canada would want to cannibalize routes that they hold a monopoly or duopoly on from Pearson.
Porter and WestJet share a customer perception that they are the little guys on the side of the people. They value simplicity and convenience, and Porter can blend in seamlessly as an eastern hub for WestJet Encore. Porter already has 26 Bombardier Q400s that would complement Encore’s seven current aircraft and 20 ordered. The Q400s have proven to be a profitable vessel and would be highly valued by Encore.
If the expansion is rejected, Porter is best suited to set itself up to be acquired by a larger player, preferably WestJet. Being acquired is the most lucrative way for Porter to step into the next stage of its growth towards becoming a large North American airline.
Although the runway is not quite clear for takeoff, Porter is in a position to grow, an initiative that has been seemingly impossible in the Canadian airline industry. In the airline’s quest to continue lightening the load for loyal passengers and refining the flying experience, the airport expansion represents the essential and logical next step that will be beneficial for passengers, residents, the TPA, and the Toronto economy at large.