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April 1, 2014 MGSD01 Prof. Borins
Mohammad Ismail
(997967730)
Zaki Shams
(993987771)
Victoria Yuen
(998254437)
“Flying Refined.” – Porter Airlines
1 | P a g e
Table of Contents Executive Summary ................................................................................................................ 2
About Porter Airlines ............................................................................................................. 3
The Team ............................................................................................................................. 4
Strategy at Porter .................................................................................................................. 5
Past Strategy ........................................................................................................................ 6
Culture .................................................................................................................... 6
Fare Environment ................................................................................................... 7
Business Model ...................................................................................................... 7
Future Strategy .................................................................................................................... 8
Strategic Analysis – SWOT ...................................................................................................... 9
Strengths ............................................................................................................................. 9
Weaknesses ....................................................................................................................... 11
Opportunities .................................................................................................................... 13
Threats ............................................................................................................................... 16
Strategic Analysis – Porter’s Five Forces Model .................................................................... 17
Suppliers ............................................................................................................................ 17
Substitutes ......................................................................................................................... 17
New Entrants ..................................................................................................................... 18
Competitors ....................................................................................................................... 18
Customers.......................................................................................................................... 19
Schools of Strategy .............................................................................................................. 19
Entrepreneurial School ...................................................................................................... 19
Positioning School ............................................................................................................. 21
Environmental and Power Schools .................................................................................... 23
Consultant’s Aspect ............................................................................................................. 27
Investor’s Aspect ................................................................................................................. 29
Conclusion and Future ......................................................................................................... 31
Appendices .......................................................................................................................... 36
Bibliography ........................................................................................................................ 44
2 | P a g e
Executive Summary
This report provides a detailed analysis of the Porter Airlines case. Our group has
gathered information from primary (such as the investor interview and Porter‘s
IPO prospectus) and secondary sources, such as the newspaper articles and
opponent campaigns. Using all this information, we provide an in depth analysis
of the Porter Airlines‘ current situation and highlight their strategy by looking at
the investor test, consulting test and connection to different schools of strategy.
Operating from the previously ―money losing‖ airport, Billy Bishop Toronto City
Airport (BBTCA), Porter has successfully has established itself as the short-haul
carrier of choice by providing superior service while maintaining a low breakeven
load factor. To expand its operations, Porter Airlines is looking into the purchase
of Bombardier CS100 jets but needs the permission for the necessary runway
expansion and permission to fly jets from its downtown Toronto airport.
Proponents claim that such expansion plan could provide economic advantages
and better customer service. However, opponents, competitors, and counselors at
different levels of the government believe this would cause permanent damage to
the waterfront. Although there is much debate about Porter‘s expansion plans,
Porter‘s investors are confident in getting the approval from city council to
expand the runway and fly Bombardier CS100 jets out of BBTCA (Soobotin
2014). The expected conditions to be placed by city council in regards to noise
level, flight frequency, and ongoing curfews are reasonably expected to be met
without issue by Porter (Soobotin 2014).
3 | P a g e
About Porter Airlines
Founded in 2002 by Robert Deluce, Porter Airlines has established itself as a
unique company in the airline industry providing point-to-destination flights in
select high traffic cities throughout Eastern and Central Canada and the U.S.
Porter, which mainly focuses on time-sensitive frequent business and weekend
leisure travelers. Porter‘s constant focus and innovative approach to cost savings
coupled with its responsiveness to customer needs has allowed it to carve a niche
and enviable position in the travel industry.
Through providing ―convenience, speed and service‖ as its customer value
proposition and operating a single smaller size aircraft out of secondary airports
with smaller runways, Porter has successfully developed a good low-cost
structure with high frequency service in the Canadian airline market.
Consequently, such operational efficiencies allow it to pass on some of these
savings to its customers while ensuring a healthy profit margin for its investors.
Porter Airlines is located at Billy Bishop Toronto City Airport (formerly known
as Toronto City Centre Airport), an island six minutes away from downtown
business district in Canada‘s financial capital (Aviation 2006). The airport
location allows business personnel to cut commute time travelling from airport to
office in both the departure and destination cities.
Porter Airlines‘ parent company is the privately-held Porter Aviation Holdings
Inc. (formerly known as REGCO Holdings), which provides ―commercial and
regional air transportation services and terminal, hangar, and office spaces‖
4 | P a g e
(Bloomberg 2014). It is also supported by three primary institutional investors –
EdgeStone Capital Partners, OMERS Strategic Investments, GE Asset
Management Incorporated, and Dancap Private Equity Inc.
Ranked as a 4-star airline at SKYTRAX (Skytrax 2014) and won the title of ―Best
Small Airline in the World‖ through Conde Nast Traveler‘s Readers Choice
Award (Conde Nast 2014), Porter Airlines has a proven success along with its
tagline, ―Flying Refined‖. The airline currently offers flights to Toronto, Ottawa,
Montreal, Quebec City, Moncton, Halifax, St. John‘s, Thunder Bay, Sault Ste.
Marie, Sudbury, Timmins, Windsor, New York (Newark), Chicago (Midway),
Boston, Washington (Dulles) and has seasonal flights to Mt. Tremblant, Que.,
Myrtle Beach, S.C., and Burlington, V.T. (Appendix 1).
The Team
Robert J. Deluce, Founder and Chief Executive Officer of Porter Airlines,
was born to a family with deep roots in aviation. Deluce and his brothers all
obtained professional ties to the industry with a father who had been a flyer for
the Royal Canadian Air Force during the Second World War (Power 2009). Being
a veteran of over 50 years in the airline industry, he had held a number of
executive positions at various Canadian airlines, such as Air Ontario, Air Alliance,
and Air Manitoba (Morassutti 2008). After selling the Deluce family‘s Canada
3000 Airline in 1998, he began to search for an opportunity in the industry. As a
founder and head of Porter Aviation Holdings Inc, Deluce put together a team of
5 | P a g e
experienced individuals and gathered a significant amount of venture capital
funding for its own wholly-owned subsidiary Porter Airlines Inc (Porter 2014).
Donald Carty, Chairman of the Board of Directors of Porter Airlines, also
has a rich experience in the aviation industry as a retired chairman and CEO of
American Airlines. While appointed as Chairman of Virgin America in 2006, it
was also announced that Carty would serve as Chairman of Porter Aviation
Holdings Inc., which launched Porter out of BBTCA (Reuters 2006).
Porter Aviation Holdings Inc., Parent Company of Porter Airlines, is a
holding company that operates through a number of wholly-owned subsidiaries,
with Porter being its core business. When it first started, Porter Aviation Holdings
Inc. had teamed up with GE Asset Management and Dancap to reach $125.7 to
support its business plan (Ranson 2006). Being the landlord of BBTCA (Sorensen
2006), Porter has become the main commercial airline flying out of the airport.
Strategy at Porter
“Porter’s primary goal is to establish itself as the short-haul carrier of choice by
providing superior customer service and convenient and high-frequency flights to
key North American business and leisure destinations.” – Porter Airlines‘ IPO
Prospectus 2010.
Implementing a differentiation strategy within the aviation industry, Porter chose
not only to compete merely on price, but also the high-quality flying experience
they can deliver to the travelers. By traveling with Porter, travelers can enjoy the
6 | P a g e
complimentary snacks and beverages, Wi-Fi, computer usage, changes and
cancellations depending on fare type (Appendix 2), just to name a few.
Past Strategy
Porter is a unique business because they also own the airport and hangars at
BBTCA besides operating their airline. This makes Porter not just an airline
industry investment but an infrastructure investment. The infrastructure piece and
resulting revenue stream from other airlines flying out of BBTCA makes Porter a
more favorable investment than another airline (Soobotin 2014).
Culture
The strong culture at Porter was a part of the inauguration strategy (Soobotin
2014). Given the public troubles of Air Canada in relation to hefty labour costs,
retirement packages and disputes, and the resulting deterioration in customer
service, Porter had a clear opportunity from non-union employees who were
excited and motivated to help customers (Soobotin 2014). Porter‘s strategy hence
included having a young and engaged workforce, showcased by its commitment
to customer service, and embodied by the crisp uniforms worn by everyone from
the airport to the flight. Porter‘s lower cost of labour, and potential for dividends
from great customer service, further made Porter a favorable investment for
Edgestone and others (Soobotin 2014).
Fare Environment
7 | P a g e
Given the location advantage of BBTCA, it was originally anticipated that Porter
could command a fare premium given the savings in commuting cost and time
compared to Pearson Airport (Appendix 3), as well as due to the premium service
such as free drinks in the lounge and in the air (Soobotin 2014). However, this
idea did not pan out for Porter as they quickly realized that customers are
extremely sensitive to price of the actual flight, and do not take ancillary costs
into consideration when comparing flight tickets across airlines (Soobotin 2014).
Porter was not large enough to be a price setter and had to accept market price,
not being able to charge any premium on its fare (Soobotin 2014). Porter
frequently runs 50% off sales on its flights (almost monthly) in order to stay
competitive in the industry (Soobotin 2014).
Business Model
Porter Airlines has a good business model which may serve it well in the near
future as is. The airline industry is a business with a high cost of entry and high
fixed costs, hence it takes a long time for new entrants to recoup this initial
investment and build up an adequate economy of scale to start bringing in profits
(Soobotin 2014). Up to the point where Porter airlines was releasing financial
information for its upcoming IPO, Porter was still running in losses although
these losses were shrinking quickly. Porter is now past this initial breakeven point
and now turning a profit for its investors (Soobotin 2014). Porter‘s customers and
flights continue to grow, which is a good signal that these profits are on the rise.
8 | P a g e
Future Strategy
On April 10, 2013, ―Porter Airlines has signed a conditional purchase order for 12
Bombardier CS100 aircraft, with option for an additional 18 CS100 aircraft.‖
(Porter 2014) With the ambition of expanding their airline services towards the
west of Canada and down south in the U.S. (Appendix 1), Porter plans to extend
the runway of BBTCA by 400 metres (Appendix 4) to accommodate the new
longer-range plane to their fleet – Bombardier CS100 (Moore 2014).
Understanding that the increase of air traffic would consequently trigger higher
noise pollution, Porter has picked the newest Bombardier CS100 for as they are
―the quietest commercial jets in production‖ (Porter 2014) and much
environmentally efficient than their current Q400. In addition, the interior of the
plane is roomier, which would give extra comfort for travelers (Appendix 5).
Claiming that such expansion plan could provide economic advantages, however,
opponents from various advocacy groups such as the Transportation Action
Ontario and NoJetsTO believe this would cause permanent damage to the
waterfront. Although there is much debate about Porter‘s expansion plans,
Porter‘s investors are confident in getting the approval from city council to
expand the runway and fly Bombardier CS100 jets out of BBTCA (Soobotin
2014). The expected conditions to be placed by city council in regards to noise
level, flight frequency, and ongoing curfews are reasonably expected to be met
without issue by Porter (Soobotin 2014).
9 | P a g e
Alternative expansion plans for Porter within current limits of 500 nautical miles
include flying to new destinations like Cleveland, Ohio (Soobotin 2014). Porter
could also expand its codeshare partnerships similar to the one it currently has
with Qatar Airways, where travellers purchase on ticket to fly all the way to Qatar,
switching planes in New York. Porter can further expand its revenue from
terminal vendors and concessions, it recently added new vendors including Hertz
car rental to increase leasing revenue (Soobotin 2014).
Porter is also still looking at getting US Customs Preclearance at BBTCA, which
will not only streamline travel for passengers, but also open up access to new
airports like LaGuardia which are designed for local travellers and do not support
inbound US customs clearance (IPO 2010).
Strategic Analysis – SWOT
Strength
1) Base of Operation
Porter has a long-term lease, together with operating rights, at BBTCA
until 2033 (Porter 2014). Located six-minute away from Canada‘s largest
city and financial capital, Porter is able to keep up to its promise of
convenience to travelers. Although it is located on an island offshore,
Porter offers complimentary shuttle buses and ferries that carry passengers
across. Other than that, being the owner of the airport gives Porter
maximum control on customer experience and entrance of new businesses.
10 | P a g e
2) Experienced Management Team
Led by aviation veteran, Robert J. Deluce, he collaborates with a highly
experienced management team of members with proven history in the
industry. Being a private company, Porter is supported by primary
investors including Porter Aviation Holdings Inc., OMERS Strategic
Investments, EdgeStone Capital Partners, and GEAM International Private
Equity Fund, L.P.
3) Lower Cost Operating Structure
a. Modern, Single Class Aircraft
Porter operates Canadian-built Bombardier Aerospace Q400 turboprop
aircraft, which is relatively more fuel efficient than comparable jet
aircrafts. Being considered as the quietest turboprops, the Q400 also
provides extra comfort for passengers with its revolutionary noise and
vibration reduction technology.
In addition, by focusing on a single aircraft yields lower operating costs
related to maintenance and training, as Porter‘s mechanics and aircrew all
work on the same aircraft.
b. Non-unionized Workforce
In Wings Magazine‘s interview with Robert J. Deluce (Pigott 2014),
Deluce had indicated that Porter‘s staff is non-unionized because of the
healthy relationship that they built with their employees. As he
emphasized, ―The front-line team is very enthusiastic and happy; they are
largely the ones who deserve credit for the high level of customer
11 | P a g e
satisfaction that we enjoy with all our passengers‖, the non-unionized
workforce results in lower labour costs as compared to its competitors.
4) Strong Brand
Being ranked 4-star by the renowned world airline rating company,
Skytrax, it signifies the overall satisfaction on Porter‘s exceptional cabin
service. When picking the company to travel, a brand‘s reputation is a
strong factor influencing consumer‘s choice of airline. Therefore, being a
top airline gives the company and competitive advantage in the industry.
Weakness
1) Poor Economy and Rising Fuel Price
As the global economy has suffering from recession since the financial
crisis in 2008, the unfavourable market conditions caused Porter Aviation
Holdings Inc. to defer their IPO in 2010 (Airline 2010). It requires high
investment capital to run a business in industries like aviation, therefore, it
could be challenging for Porter to gather funding that supports their future
expansions. In addition, as shown on Appendix 6, the price of fuel has
been increasing since 2009. While high fuel price means higher breakeven
load factor1, Porter must adjust their other expenses to achieve a
breakeven and remain competitive.
2) Future Expansion Uncertainties
1 Every airline has what is called a break-even load factor That is the percentage of the seats the airline has
in service that it must sell at a given yield, or price level, to cover its costs, see "Airline Economics"
http://www.avjobs.com/history/airline-economics.asp
12 | P a g e
Although the CSeries are still in flight testing stage, Porter must begin to
make a decision on whether or not to put down the non-refundable deposit
based on the conditional approval from council. While a business
expansion might be a good way to boost up revenue for Porter through
capturing more market share, there are a lot of uncertainties coming from
the external environment such as regulations and oppositions from new
destination and advocacy groups.
3) Opposition to Expansion
Porter is facing opposition for its expansion from some city councillors as
well as NoJetsTO, a group organized solely to oppose the expansion at BB
Airport and disallow jets on this airport. One of the major challenges
raised by opponents to flying CS100 jets out of downtown Toronto is the
possible increase in noise. Given the subjective nature of noise reception it
is hard to say definitively whether Bombardier CS100 jets will make any
more noise than the current Q400s (Semeniuk 2013). The noise level
during landing, takeoff, and braking varies greatly, and the noise limits
usually placed are based on a combination of noise during these intervals
(Semeniuk 2013). This means the CS100 could possibly make more noise
during one of these three instances than the Q400, but would be
considered within the noise limit as long as it compensates for this extra
noise during another interval. The noise level also depends on the
environment, wind direction and other atmospheric details, making it
difficult to assess the volume of noise until the CS100s are actually flown
13 | P a g e
to and from BBTCA (Semeniuk 2013). Finally, what constitutes
unbearable or annoying levels of noise is also subjective and varies from
person to person. All these factors combine to make the possible noise and
harm to waterfront due to jets a lively and continuing debate.
4) Privacy
Porter faces an uphill battle in rallying citizen support for its proposal
while releasing very limited information to the public about its operations
and profitability. Given Porter is a private company it has no obligation to
provide this information to the public. Furthermore, Porter has a strategic
reason to withhold this information to maintain competitive advantage
(Soobotin 2014). Porter‘s business may be increasing but it remains a
small player in the larger picture, and having its financial and business
position available can allow larger airlines to price out or otherwise buy
out Porter (Soobotin 2014). This is comparable to Air Canada not
disclosing how much money it is losing operating out of BBTCA while
trying to give Porter some competition (Soobotin 2014).
Opportunities
1) Dying Airport
Porter had seized the opportunity of investing into the dying airport. In
2003, Toronto City Centre Airport (TCCA, now BBTCA) was facing
devastating financial difficulties due to the lack of air traffic traveling
through this airport. In order to preserve this location, the Toronto Port
14 | P a g e
Authority (TPA) planned to renovate the terminal buildings and tried to
attract Air Canada for more flights, who had minimal interest because
there was no competition. Understanding that a regional airline could be
run out of the TCCA successfully, Deluce pitched his idea to the TPA and
eventually became the landlord of the airport who was facing bankruptcy.
2) Runway expansion for CS100 jets
Porter has several alternatives available to expand its business, and
Porter‘s business continuity does not entirely depend on the runway
expansion for jets (Soobotin 2014). Nonetheless, runway expansion and
permission to fly CS100 planes out of BBTCA will provide a major step
forward and allow Porter to become a bigger player giving more
competition to larger rivals like Air Canada and Westjet. The potential for
Porter is huge given new destinations like Alberta, British Columbia,
California, Florida, and sun destinations like Bahamas. A quick
comparison of fares between Toronto to Vancouver and Buffalo to Seattle,
which are very similar in distance, reveals the price is almost double in
Canada, and there is much room for increased competition on these routes
(Soobotin 2014).
Air Canada which currently operates a few airlines out of BBTCA would
not support the expansion at BBTCA (Soobotin 2014). Air Canada
operates a few flights primarily to compete with Porter, it would be more
efficient for Air Canada to limit operations to its one base which is
Pearson Airport. For Air Canada, Pearson can support both its small and
15 | P a g e
larger aircraft, and operating any flights from BBTCA increases operating
costs. Air Canada would also be at the end of buyer list for Bombardier
CS100 planes if it got into the game now, providing Air Canada another
reason not to support the expansion.
If Porter did however get the approval and built the extended runway, Air
Canada, WestJet, and possibly other new entrants could start operating
their own flights out of BBTCA. The challenge will be that given the
curfews and limitations on number of flights likely to be placed by City
Council, Porter might max out the available flights themselves, or keep the
capacity for themselves. In any case, any other airlines flying out of Porter
will provide additional revenue for Porter through service fees/taxes for
takeoff/landing, hangar use, refueling services and miscellaneous services.
Hence the expansion will further strengthen Porter‘s infrastructure
business on top of promoting their airline business.
If the CS100s do get permission to be flown from BBTCA, there is also a
future possibility for Porter to fly as far as Europe by reducing the number
of seats on the planes (Soobotin 2014). While Porter has done this with the
Q400s reducing the number of seats from 78 to 70 (later adding back 4
seats), the ability to reduce seats on the CS100 to fly as far as Europe may
not be entirely feasible because as much as half the seats may have to be
removed to allow this journey (Soobotin 2014). Nonetheless, the
opportunity to offer a first class only type flight between Toronto and
16 | P a g e
London might be a possibility subject to demand and cost based on this
modified plane configuration.
3) Connection to Toronto Pearson Airport
In light of more frequent flight schedule after the expansion, Porter can
benefit from the Union Pearson Express coming in 2015. The Union
Pearson Express will bring passenger to travel from Union Station to
Pearson Airport in 25 minutes (Union 2014). Using the free ferry ride
from BBTCA and free shuttle bus to York and Front Street, travelers can
conveniently arrive at Pearson Airport for a connection flight. However,
Porter must bear in mind that the Union Pearson Express would provide
the convenience for Air Canada travelers as well.
Threats
1) Competition
Started as a regional airline, their expansion could become difficult when
facing players such as Air Canada and WestJet, who might have higher
capital to afford more aggressive actions. For instance, reduction in fare
prices through promotions and frequent flyer incentives to retain loyal
travelers.
2) Government Intervention
With an arising number of advocacy groups opposing to Porter‘s operation
at the BBTCA, it would not be a surprise that the government to take an
action in answering the public‘s concerns. Although they have an
17 | P a g e
agreement with the Toronto Port Authority for access to the airport until
2033, this threat should not be overlooked as the location is one of the
major competitive advantages of Porter.
Strategic Analysis – Porter’s Five Forces Model
Supplier
The bargaining power of supplier, which includes Bombardier, fuel suppliers,
mechanics, and flight crews, is considered moderate. Although Bombardier is the
only major supplier for the business, Porter is also the main purchaser of the
Q400s. Porter‘s strong market base and the way they differentiate from
competitors give Porter a better position in negotiations.
Substitute
The threat of substitute products is considered low to medium, although its
competitive advantage of convenience due of the airport location is parallel to
what other transportations can offer in downtown Toronto, such as VIA Rail and
buses. In terms of price, train tickets are relatively pricier than most of the
economy flight tickets. In terms of time saving, traveling on road takes longer
than air.
18 | P a g e
New Entrants
By buying up the land and hangars at BBTCA, Porter has reduced the threat of
entrants to low through limiting their access of these facilities. However, Porter
must keep an eye on new low cost brands like Air Canada‘s Jazz and other
competitors such as WestJet, especially when they want to expand to the west
coast of Canada.
Competitors
The competition within the aviation industry is considered high with Air Canada‘s,
their major competitor, ability to capture market share and eliminate small carriers
through price reductions. Therefore, it is important for Porter to focus on the main
competitive advantages that differentiate themselves from the competitors such as
location, customer experience, and convenience. As mentioned, Union Pearson
Express could provide an advantage to Air Canada as it becomes less time
consuming to commute to the Pearson Airport, hence, diminishing the
convenience benefit of the downtown airport location. As a result, it is crucial for
Porter to come up with another differentiation strategy, such as the expansion plan
to new destinations at competitive price.
Customer
The bargaining power of customer is considered medium to high due to Porter‘s
lack of differentiation points among competitors. Therefore, the company must
19 | P a g e
keep up every aspect of its business to provide the best quality possible at
competitive price. For instance, it is a must to keep customer service a top priority.
Schools of Strategy
Entrepreneurial School (A Visionary process):
The entrepreneurial school looks at the strategy as a visionary process. A process that
relies heavily on intuition, wisdom, experience and insight of that leader. Robert J.
Deluce, the current president, CEO and founder of Porter airlines Inc. came up with the
idea of creating a regional airline using Bombardier turboprop aircraft to major cities of
Canada within the range of Toronto. He is one of Canada‘s most knowledgeable and
respected airline owners and operators and brings to the industry over 60 years of Deluce
family experience in successfully owning, financing, restructuring, operating and
managing a number of regional airlines in Canada. He also won the Ontario Entrepreneur
of the Year award for emerging entrepreneur.
Traffic to the island airport declined for decades, and by the early 2000s it had
become a chronic money-loser. Its last remaining scheduled carrier, Air Canada
Jazz (created, ironically, from the ashes of Air Ontario), had essentially given up
on it. To Deluce, that airport was a grossly underused asset. So when the Toronto
Port Authority announced its intention to make the airport self-sufficient by
increasing traffic, Deluce hatched his plan: an airline that would fly fuel-efficient
turboprops on well-travelled business routes, as well as to Northern Ontario
destinations whose passenger demand and pricing sweet-spots he knew all too
well.
20 | P a g e
Since Porter‘s 2006 launch, when its two lone aircraft shuttled back and forth
between Toronto and Ottawa, Porter has grown to a fleet of 26 Bombardier Q400
turboprops. By 2012, Porter‘s share of passenger traffic on the Ottawa-Toronto
corridor had risen to 25%, and its list of destinations has grown to 19 cities across
eastern North America. Porter opened a new, larger, passenger terminal at the
island airport in March 2010. In 2013, Porter made a proposal to expand Toronto
Island airport and to allow Bombardier CS100 planes equipped with ―whisper jet‖
engines that would allow Porter to serve more destinations. The proposal is
subject to intense debate in the city council these days.
He‘s arguably the most successful entrepreneur in Canadian aviation history.
Whatever the outcome, one thing is certain: it‘s not smart to bet against Deluce.
He‘s taken Porter from two planes and a team of 200 back in 2006 to 26 planes
and 1400 team members. And while debate over jets continues, an 800-foot
pedestrian and utilities tunnel is currently being built to BBTCA – with an
expected completion date for the spring of 2014.
Deluce has the feisty spirit of all true entrepreneurs, having overcome high-profile
obstacles like former Toronto mayor David Miller‘s campaign to stop the bridge
to BBTCA. In an industry that attracts only the most outgoing, competitive, risk-
taking entrepreneurs, Deluce is the highest-octane of them all. Both his backers
and his opponents describe him as shrewd, iron-willed and, above all, persistent—
like a Survivor contestant, he‘s able to outwit, outplay and outlast larger rivals.
Under his influence, that airport has gone from desertion to prosperity. As
21 | P a g e
Calgary-based consultant Rick Erickson puts it, ―If you cut his arm, I swear,
aviation fuel would spill from his veins.‖ According to one observer, ―He runs his
airline like a family restaurant.‖ And according to one lawyer, ―The airport
should be renamed Bob Deluce Airport, because of his extent of control and
influence,‖ says one lawyer, Julian Falconer.
The way Deluce tells it, going from turboprops to jets will be no more disruptive
than upgrading your cellphone: the new one is faster, more efficient and just as
quiet.
Positioning School (An Analytical Process)
The positioning school places a business within the context of its industry and
looks at how the organization can improve its strategic positioning within that
context. It looks at the strategy from a scientific and analytical lens and bases the
decisions on hard facts. When Entrepreneur Robert Deluce launched ―Porter
Airlines‖ in 2006, no one could have imagined that the low-cost carrier would
survive in an already crowded North American Airlines market, where many
competitors were shutting down their activities. However, two years after starting
its operations, Porter Airlines reached cash break-even and since then, the
company is profitable. The key to Porter‘s success was the focus on
differentiation. According to Michael Porter (1985), ―a firm differentiates itself
from its competitors when it provides something unique that is valuable to buyers
beyond simply offering a low price‖. In the low-cost carrier market, most
22 | P a g e
companies focused on high-density route and low price to gain market share.
Porter Airlines analyzed the value chain and found a niche in the downstream
where it could avoid competing on price. The company decided to enhance
customer service and focus on regional business traveler that value convenience
and premium service.
Porter opened a 10-gate terminal in 2011 at a cost of $50 million, one that avoids
the conveyor-belted people-processor feel endemic to airports. Once you‘ve
checked in at BBTCA, a brief escalator ride takes you down to sleek, intimately
arranged lounge seating with coffee tables and lamplight. Off to the side, a
spacious self-serve area offers various refreshments, all free of charge. As for the
attention to detail, instead of paper cups, the lattes are served in mugs, and are
held in a special countertop rack that warms them as they wait to be used. With
respect to the main Toronto airport, business travelers, the main focus of the
company, could leave downtown Toronto and board in less than an hour. A free
shuttle and ferry is provided and that creates a significant advantage. On the flight,
The Q400 bombardier fleet fitted with leather seats and extra leg room enhanced
customers value.
The key to Porter Airline uniqueness was to choose an airport 5 minutes from
Downtown Toronto and the loyalty built through customer services. By
differentiating oneself and being unique in a way that is difficult to duplicate, it‘s
possible to thrive even in highly competitive markets. The result, Potential IPO in
2010 and Porter Airline‘s current efforts to buy up to 30 CS100 jets from
Montreal-based Bombardier, which would expand the regional carrier's
23 | P a g e
reach from coast to coast, and take direct aim at Air Canada and WestJet. "We
believe it is time to spread our wings," president and CEO Bob Deluce said at a
news conference at BBTCA, where Porter is based. "And so I present to you our
vision for the future of Porter Airlines — a vision with service to destinations
across North America, from Calgary and Vancouver, to Los Angeles, Miami and
Orlando." However, this move pushes Porter into a potential new position of
direct competition with Air Canada and WestJet as a national carrier, while
setting up a potential political standoff over expansion of the island airport in
downtown Toronto.
Environmental and Power Schools (A Reactive Process and a
Negotiation Process)
According to the environmental school, strategy is a response to the challenges
imposed by the external environment. Similarly, the Power school proposes that
strategy is a process of negotiation between power holders within the company
and its stakeholders. In the case of Porter Airlines, both these schools coincide at
various occasions. Porter forms a strategy looking at the environment and then
has to negotiate it with stakeholders, to implement it. "Given current market
conditions, we believe it is prudent to defer the IPO at this time. Our company is
well-positioned to wait until the equity markets stabilize before deciding whether
to proceed with a new public offering."- Robert Deluce. ―It's going to be
interesting to watch how WestJet and Air Canada react once Porter starts biting
into their business. They're going to retaliate, and the only way they can retaliate
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is lower prices. This may trigger a vicious price war,"- Joseph D'Cruz, UofT
professor and aviation expert. "The runway's not long enough and to get an
agreement to lengthen the runway, they‘re going to have to go before-three levels
of government (The City of Toronto, the federal government and Toronto Port
Authority), not to mention community opposition, environmental studies, so
there‘s a fair degree of long shot in Bob Deluce‘s plans for Porter today," said
Kokonis, who also questioned how the expansion will be financed. The
announcement could lead to a political dispute over the airport, which is near
residents on the island and the cities heavily populated downtown.
No Jets T.O.
A group called No Jets T.O., claim there are health risks and safety hazards that
outweigh the economic benefits. No Jets T.O. has made claims about air, noise
and water pollution, jet blasts, bird strikes, fuel spills and emergency landings.
The group also claims the expansion would jeopardize development along the
waterfront, hurt property values and increase gridlock. A report prepared by
Transport Action Ontario, another volunteer group opposed to the plan, claims the
expansion would lead to wider restrictions for watercraft in the harbor.
In mid-April 2012, Porter conducted Canada‘s first bio-fuel powered revenue
flight. The successful flight was intentionally scheduled just before Earth Day
with a Bombardier Q400 turboprop. ―Q400 and Q400 NextGen aircraft are
already among the ‗greenest‘ aircraft in the world and the use of biofuel will make
the aircraft even more environmentally conscious.‖ – Deluce. "We knew that
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operating from a downtown urban airport would require us to be responsible
operators and good neighbors, said Deluce. ―We believe that our track record of
nearly seven years has shown that Porter has delivered on the promises we made
when we announced plans to operate from this airport. We believe the CS100 is
the perfect aircraft for the next stage of our growth for many reasons, not the least
of which is that it is the quietest commercial jet in production."
Competition
Air Canada and WestJet have been watching closely and girding for a battle—but
not the one you would expect. Instead of trying to foil his expansion, they are
letting him do the heavy lifting with regulators; once that is done, they will fight
him in the skies. New competition is expected in the Canadian market. WestJet
unveiled Encore to target smaller locations in Western Canada. A few days later,
Air Canada rolled out Rouge, to service holiday destinations. Both are low-cost
carriers, cheaper to operate than flagship lines, because hiring new staff allows the
carriers to pay them less. Meanwhile, Porter wants to boost competition even
more by adding a slew of new jets and destinations in 2016, expanding from a
regional player to a national one. Porter Airlines, a regional carrier, caters
primarily to business travelers between Toronto, Ottawa and Montreal (the golden
triangle), but since launching in 2006, Porter has grown to service 19 destinations.
By 2016, it wants to fly Bombardier CSeries jets to more far-flung locales,
including Calgary, Vancouver, Los Angeles, and Miami.
Mayoral Candidates Weigh In
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Porter‘s proposal has become a hotly-contested item at city hall and a significant
point of debate in this year‘s municipal election. ―We should leave it as it is,‖
Olivia Chow, the former NDP MP said in a written statement. ―Taxpayers
shouldn‘t spend $100 million on expanding a runway at the island airport to allow
jets and next year, above ground rail will link us with Pearson Airport, making
travel faster and easier.‖ Porter could continue their downtown airport brand by
partnering with Union Pearson Express. Check in at Union Station, right at the
very center of the financial district -- no more shuttle bus -- and get whisked to
YYZ into a Porter lounge where you'll clear security, your check in baggage
already having been taken off your hands at Union station and loaded on to your
flight. The Toronto Region Board of Trade again spoke out in favor of Porter‘s
plan Tuesday, saying its support is based on two conditions: that the jets receive
noise certification from Transport Canada and conform to existing noise limits,
and that the TPA and city agree on a funded plan to address congestion issues.
Back in 2006, Porter Airlines and the Government of Canada signed an agreement
offering federal employees increased choice and flexibility when flying between
Toronto and Ottawa. Porter was the first airline to sign such an agreement prior to
start-up. The agreement was in support of the government‘s Shared Travel
Services Initiative (STSI), part of Public Works and Government Services
Canada. Currently, according to Porter, world-class cities have outstanding
transportation networks. Porter now wants to expand its operations – to create
another 1,000 jobs; help Canada‘s only aerospace manufacturer; provide
increased competition; and make it easier for more people to get to the heart of
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Toronto. The company‘s new plans likely will create an additional $2-billion in
economic benefits for the city. All this while barely affecting the marine and noise
pollution. After the 11-1 vote in favor of Porter last week, Bob Deluce said earlier
on Tuesday that ―conditional approval‖ was a ―necessary next step,‖ but after the
vote he said he was pleased with the outcome. He reaffirmed his commitment to
abandon the proposal if the Bombardier CS100 planes he plans to purchase do not
meet noise conditions or if they require a material change to the safety zones in
the harbor.
Consultant’s Aspect
After analyzing Porter‘s strengths and weaknesses based on the external and
internal factors, it is suggested that investors should hold off investing into Porter
Airlines until a little later. As a growing company with an experienced
management team, Porter‘s traffic data has been increasing (Appendix 7) even
though the financial crisis happened a few years after they started. They had
successfully seized the opportunity of operating out of a city center airport, and
were able to eliminate a major competitor – Air Canada.
In addition, setting up a low cost operating structure also benefits Porter in
running their business. Although we did not have access to the company‘s
financial reports, it is apparent that by operating a single aircraft and having a
non-unionized workforce can provide savings in terms of maintenance and labour
expenses.
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However, as the debate on Porter‘s expansion is still heated, there are lots of
uncertainties regarding their future. While the size of BBTCA is limited, Porter
can only operate a certain number of flights every day. Without further expansion,
it becomes difficult for the company to generate extra income. In addition,
competitors might turn this constraint into their opportunity by competing for
Porter‘s customers through better customer experience and cheaper air fares. If
the expansion plan is approved, Porter can gain more market shares by increasing
their destination options and it is suggested to invest now based on the company‘s
competitive advantages and their reputation. Otherwise, it would not be a wise
investment now as the status quo‘s payback would not be significant.
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Investor’s Aspect
From an investor‘s perspective, Porter Airlines currently stands on crossroads.
The biggest uncertainty facing the company is the approval from city council for
its proposed runway expansion and CS100 jet operations. If Porter does get this
approval it gets the ability to grow quickly and become a much larger competitor
in the industry. Disapproval means all future plans for growth face a serious
challenge.
Expansion Approval
If Porter gets the approval, it will become a larger airline with more and farther
destinations, and can compete on even ground with other airlines for market share.
Given Porter‘s history of innovation and brand value, Porter is reasonably
expected to gain a large chunk of the market share and maintain it. In this case
Porter Airlines will appeal to investors looking for high returns, in both medium
and long term, with medium to high risk profile. There is higher risk also because
the approval is only the first (although important) step in executing on this
expansion plan. Bombardier CS100 jets are still in the testing phase and have not
gained approval to fly at any airport yet, there is some risk associated with this,
although the likelihood of fail is low. Porter may also face challenges in the
construction of this runway, and will face continued challenges and opposition
given the growth in traffic and congestion in the area. The construction of the
tunnel will help to get passengers to BBTCA.
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Expansion Rejection
On the other hand if Porter does not get the approval, it will continue to be a small
regional carrier with positive prospects while growing their traffic, and increasing
flights and destinations mildly to support this growth. Porter‘s ability to grow will
be seriously hampered, and it will be an indication that any sizable future growth
for Porter will be unlikely as it will need city approval for increasing flight
volumes past current limits, or to shorten curfews, etc. While Porter will continue
be a profitable company in this scenario, it will attract a very different type of
investor, those looking for long term stable growth with less risk.
Overall, we expect Porter to get the approval for runway extension and CS100 jets,
with certain restrictions placed by City Council. These restrictions should not
pose a risk to Porter‘s operation as it currently has several restrictions and curfews
which it operates under. Porter has previously been able to fight off noise and
other complaints, and it may need to continue doing so. Given the expected
approval Porter Airlines makes a good investment, especially if it does not
already charge a premium based on the expected approval. Porter Airlines
continues to be a medium to high risk investment like most of the airline industry,
and faces some additional risk given its downtown location, ongoing opposition
from citizens, and some uncertainty of political support. Even if the current
Government supports Porter‘s expansion, there is no guarantee that future
Governments will follow suit, and they may try to oppose, dispute, and even
revoke Porter‘s permissions like David Miller did with the bridge. Porter makes a
good investment for someone looking to bet money on Porter getting the approval
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and being able to capitalize on the new opportunities for at least some time to
come. It is a risky investment, but the risk-taker may get a hefty reward for
sticking along for the ride.
Conclusion and Future
Trend
The airline industry plays an important role in both the Canadian and global
economy. The airline industry is particularly important in Canada given the
country‘s large territory and widely dispersed population. In 2008, Canadian
airlines carried over 75 million business and leisure passengers, with over 86
million daily seat-miles across the country. Canadian carriers also play an
important role in the transport of goods within the country and in the
import/export market. Over the past three decades, governments have gradually
reduced economic regulation of commercial aviation which has transformed the
airline industry, allowing new market entrants, including low-cost carriers, to
emerge and compete successfully with full-service airlines. However, in response
to reduced service levels from these new entrants, and heightened passenger
frustration with full-service carriers, the industry has seen many low-cost carriers
moving towards a ―hybrid‖ airline model - a strategy that blends low-cost carrier
traits with some full-service carrier business practices to help grow their
passenger base and expand market share. Some of the full-service carrier
attributes being introduced by these hybrid low-cost carriers include use of global
distribution system services, code-share arrangements, multiple fare options,
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advanced ticketing procedures, multiple aircraft types, multiple classes of service,
and long-haul (including international) destinations. In addition, the customers are
looking for more convenience at lower costs, the operators are looking for
consistent growth and growing market share with low costs (fuel-efficient planes
being used) and governments are looking for more revenue and public support
and safety.
Competitive Landscape
New competition is coming to the Canadian market, with both WestJet and Air
Canada recently launching subsidiaries and Porter Airlines wants to boost
competition even more by adding a slew of new jets and destinations in 2016,
expanding from a regional player to a national one. All of these developments
mean consumers could benefit through more choice, increased flight frequency
and even lower fares. Some carriers are boasting of reductions of up to 50% on
certain routes. What‘s more, we could see a greater focus on customer service as
airlines fight for passengers.
Prospects
Jet-powered aircraft are currently banned at the island airport, which is governed
by a Tripartite Agreement signed in 1983 by the city, Toronto Port Authority
(TPA) and Transport Canada. All three sides must agree to amend the agreement
to allow the runway extension and the use of Bombardier CS100 jets that would
make way for Porter to expand its network to farther destinations in North
America. If council agrees to proceed with the negotiations, a long and
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complicated process would begin with city staff presenting conditions that must
be met over three phases before they will even consider giving a recommendation
on amending the agreement. Those conditions include limits on passenger volume
and flight slots in an effort to manage the airport‘s growth. The caps are based on
forecasted passenger volumes and local road capacity. Staff also wants assurances
from the Toronto Port Authority and Transport Canada that concerns about noise,
road traffic, flight paths, chemical and fuel management and curfew hours will be
resolved.
Deputy Mayor Norm Kelly, long a supporter of airport expansion, said the latest
report represents a ―significant improvement‖ from one in November that said it
was ―premature‖ to approve an expansion plan. Among the major mayoral
candidates, Rob Ford supports island airport expansion and Olivia Chow is
opposed. David Soknacki, Karen Stintz and John Tory have been reluctant to
commit themselves, pointing to the unanswered questions the expansion plan
raises. Toronto‘s executive committee voted Tuesday 11 to 1 in favor of asking
staff to embark on negotiations that could lead to expansion of the island airport
and a lifting of the jet ban, but the final say wouldn‘t come until next year. An
attempt by councilor Peter Milczyn to stop studying Porter‘s plans altogether
failed.
Deluce says Bombardier has guaranteed him the CS100 will have a noise
signature similar to the Q400, and his purchase agreement is conditional on the
performance. “If the CS100 can’t meet the requirements, we don’t want it,” he
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says. “My company is profitable, and we would be happy to continue as a
regional operator.”
Porter‘s future performance will depend upon a number of factors, such as their
ability to:
• Capitalize on their initial business strategy;
• Implement their planned growth strategy;
• Provide superior customer service at reasonable prices;
• Attract, retain and motivate qualified personnel;
• React to customer and market demands; and
• Maintain the safety and security of their operations.
Dependence on BBTCA, failure to achieve growth strategy, ability to obtain
financing for additional aircraft, litigation risks. Public safety, limited fleet and
operations (hence capped growth potential in operations and HR) and Industry
risks such as economic conditions, environmental requirements, seasonal nature
of the business, government intervention, regulations and intensifying competition
are the risks that Porter should worry about in the long run. However, As an
innovative growth company in the airline business, with business strengths such
premium service offering, integrated, scalable, low cost platform, modern fleet,
strategic base of operations – downtown Toronto at BBTCA, and a proven
management team with high level contacts and decades of experience, the
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investors, supporters (general public and in government) and the CEO Robert
Deluce are confident about the bright future of Porter Airlines.
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Appendices
Appendix 1: https://www.porterplans.com/Plans
http://www.porterplans.com/Content/images/plans/routes/new-routes-870.jpg
37 | P a g e
Appendix 2: https://www.flyporter.com/Travel/Fare-Structure?culture=en-CA
Firm Fare Flexible Fare Freedom Fare
Flight Changes - Canada
Changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time for a $75.00 CAD/USD charge per change /cancellation per direction per passenger, plus fare difference and applicable taxes, subject to availability.
Changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time for a $50.00 CAD/USD charge per change /cancellation per direction per passenger, plus fare difference and applicable taxes, subject to availability.
Complimentary changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time, subject to fare difference, applicable taxes and availability.
Same-day airport change
Same-day changes are permitted at the airport for $150 CAD/USD Per passenger per direction plus applicable taxes, subject to availability. Same-day changes are permitted at the airport for travel between Toronto and Montréal or Ottawa for $75 CAD/USD Per passenger per direction plus applicable taxes, subject to availability.
Same-day changes are permitted at the airport for $75 CAD/USD Per passenger per direction plus applicable taxes, subject to availability.
Complimentary same-day changes are permitted at the airport, subject to availability.
Refunds
Cancelled flights are credited (less change fee) for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance.
Cancelled flights are credited (less change fee) for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance.
Cancelled flights are credited for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance. Refunds can be obtained by calling the Porter Call Centre.
VIPorter points Eligible VIPorter members earn 375 VIPorter points per direction.
Eligible VIPorter members earn 750 VIPorter points per direction.
Eligible VIPorter members earn 1500 VIPorter points per direction.
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Appendix 3: Taxi fare to Pearson from Toronto $45 one way x 2 = $90
Taxi fare to Billy Bishop Airport from Toronto $10 one way x 2 = $20
Savings = $70
Appendix 4: http://www.porterplans.com/Plans
http://www.porterplans.com/Content/images/info/airport/200m-15-Rwy-08-and-26-overview.gif
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Appendix 5: http://www.porterplans.com/Content/images/plans/planes/jet-comparison.png
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Appendix 6: Source: US Energy Information Administration
http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=60
2009 2010 2011 2012 20132014
(till Feb)
Average Price/Gallon $1.68 $2.15 $3.00 $3.06 $2.92 $2.95
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Average Jet Fuel Price/Gallon
2009 2010 2011 2012
Load Factor 45.90% 54.20% 61.70% 62.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Porter Airlines' Load Factor (Year 2009 to 2012)
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Appendix 7: Traffic Data from Porter Airlines‘ news releases
https://www.flyporter.com/About/News-Releases?year=2013&culture=en-CA
2009 2010 2011 2012
RPM 314.2 589.9 801.7 914.2
ASM 655.6 1089.5 1298.6 1475.3
0
200
400
600
800
1000
1200
1400
1600
(in
mill
ion
)
Porter Airlines' Traffic Data (Year 2009 to 2012)
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