By Vinay Bhaskara / Published November 17, 2015
Early November, the newly elected Liberal Canadian government reiterated its commitment to not allow jet aircraft at Toronto’s Billy Bishop Airport. The downtown airport, located on the Toronto Islands directly south of downtown Toronto, is the home base and largest hub for regional carrier Porter Airlines, which is Canada’s third largest carrier (a distant third behind Air Canada and WestJet. The move by local denizens of Canada’s now-majority party threatens an order for up to 30 (12 firm + 18 option) CS100 airframes from troubled Canadian aircraft manufacturer Bombardier.
Porter Airlines, founded in 2006, has built its business model around the convenience offered by Billy Bishop Airport, located just a few minutes away from Toronto’s Central Business District. Between 2006 and 2011, Porter was a growth engine, building rapidly up to a fleet of 26 Bombardier Dash 8 Q400 aircraft. But due to constraints at its home base (including slot caps), and a lack of suitable destinations within the Q400’s performance window, Porter has been basically stagnant since that point. The order for the CS100 was aimed at allowing Porter to resume growth and broaden its geographic reach, while also giving it the flexibility to expand using its Q400s throughout Eastern Canada. However, the CS100 requires 4,800 feet of runway for operations, necessitating the proposed 400 meter extension of the runway at Billy Bishop to more than 5,300 feet.
Understanding Porter’s network and the need for the CS100s
As it has been since its inception, today Porter Airlines is heavily focused on its hub at Toronto City, where it offers close an average of 75 flights per day, offering service to 15 destinations (10 in Canada) year round, as well as 5 seasonal ones (1 in Canada). The table below provides an overview of Porter’s operations at Billy Bishop, and as it indicates, Porter’s routes largely fall into three buckets: high frequency services to key business destinations in large markets, low frequency (but still more than daily) flights to regional destinations, and sporadic service to vacation destinations seasonally.
Beyond Toronto City, there isn’t much to Porter’s network, and what little there is focuses on the eastern half of Canada. Within the network, Halifax is a distant second in terms of importance. It offers nonstop service to 4 destinations (interestingly not to Toronto City however), including 31 weekly flights to Ottawa and twice daily flights to Montreal. Halifax is also the only gateway to Newfoundland in Porter’s network, including nonstop service to Stephenville, with seasonal flights once per week in the summer, and St. Johns with 18 flights per week year round. Beyond the Halifax “focus city” (sharply stretching the definition), Porter offers winter seasonal service between Mont Treblant and Newark a couple of times per week, as well as to Montreal a couple of times weekly. Finally, Porter offers daily service between North Bay and Timmins (two regional destinations), and daily service from Ottawa to Moncton. And with no Q400s on order, Porter’s does not appear poised for further growth of this type.
In order to escape the limitations of its current business model, Porter decided to move into a different sandbox by placing the order for the CS100 and planning the runway extension. The smaller CSeries variant, which would seat 100-110 passengers in Porter’s configuration, would allow service to longer-distance destinations like Los Angeles, Vancouver, Calgary, Edmonton, Winnipeg, and the like. This would allow Porter to expand into new, lucrative markets and increase its relevance to Toronto based frequent flyers that require service to the Western United States and/or Western Canada. In order to fund this expansion, Porter sold its terminal at Billy Bishop for $750 million, a massive increase over the $50 million it was valued at back in 2011. This cash is planned to finance 20-25 of the CS100s without forcing Porter to take on additional debt (nearing $350 million at press time).
Even without access to jets, the runway extension is still of critical importance to Porter. Right now, Porter has configured its Q400s with 74 seats instead of 78 because the current runway is on the edge of the performance window for the Q400. With a runway extension, they could fly the Q400 on longer distance routes from Billy Bishop, including nonstop to Newfoundland and Halifax as well as the entire eastern half of US including St. Louis, Minneapolis, and others.
Porter needs to grow into an IPO
Financially, according to our sources, Porter has hovered around break even or slightly above that point for the last four years, since crossing into the black back in 2011. However, these profits haven’t yet been sufficient to pay back Porter’s initial investors, including Borealis Infrastructure, the investment arm of the Ontario Municipal Employees Retirement System (OMERS). Those initial investors put $125 million into the company back in 2006, and to date the dividends from the paltry profits recorded haven’t come close to generating a viable return for the initial investors.
In order to generate a viable return, Porter needs to hold an initial public offering (IPO) for the company, paying back initial investors with some of the proceeds. But Porter has previously tried an IPO (in 2010), withdrawing its plans when the initial demand was tepid. And Porter isn’t well positioned for an IPO, at least without the CS100s. Investors in an IPO tend to look for one of two things – high and sustainable profit margins, or sharp revenue and customer growth. Right now Porter offers neither of those things, and it probably cannot without a runway extension and/or the right to operate jet aircraft at Billy Bishop.
Options for growth are unclear without a runway extension and jets – but it isn’t over yet
The only other possibility, and an unattractive one at that, is for Porter to expand in the Eastern half of Canada beyond Toronto. This would necessitate either replicating its Billy Bishop strategy at other key business destinations like Montreal or Ottawa, offering more point to point regional service (such as between North Bay and Timmins), or a mix of those two options.
But Porter’s competitive situation in the eastern half of the country is certain to be squeezed by its much larger rivals, Air Canada Express and WestJet Encore. Air Canada is the current operator on most of these routes, using the same Q400s that Porter flies on regional services from Ottawa, Montreal, and Halifax.Meanwhile, WestJet’s regional arm Encore has been highly successful flying regional routes in Western Canada and still has 23 Q400s on order (with 22 already in its fleet). Encore is certain to expand to Eastern Canada, which would handicap Porter’s opportunities for growth given the cost delta between the two carriers.
The one silver lining is that there is a chance that more slots will open up at Toronto City. Air Canada Express has operated 15 flights per day from Billy Bishop for the last 3 years, all to Montreal, competing on what is Porter’s most lucrative route. But as it seeks to strip cost from its business, Air Canada is evaluating withdrawing from Toronto City, where its loss-leader service mostly serves as a thorn in Porter’s side. Assuming WestJet doesn’t step in to fill the void, this would give Porter 15 additional daily slots to play with, which it could use to serve more tier 2 business destinations in the Eastern US like Pittsburgh. Additionally, because its schedule is overloaded on weekdays (most destinations have far fewer flights on weekends), Porter still has some room to play around with Saturday or Sunday only service to vacation destinations with slack in its current fleet.
But none of this is ideal, which is why it’s critical for Porter to win the right to operate the CS100s at Billy Bishop. And despite the immediately bleak prospects, Porter still has some long run cards to play. For example, while opposition to the new flights is high amongst residents of the Islands and Toronto’s waterfront, the overall Toronto metro area is in favor of jets at Billy Bishop. Moreover, Porter has made its CSeries order contingent on winning the right to operate jets at Billy Bishop, and Bombardier is a powerful figure in Canadian politics (look no further than its recent financial backing by the Quebec government). Porter’s cause still has political support, and if it can mobilize its constituents (passengers, particularly business travelers, who value the convenience of Billy Bishop) a little better, then it may still win out in the long run. But for the moment, the status of runway expansion and jets at Billy Bishop is close to dead on arrival. Accordingly, Porter Airlines’ future hangs in the balance.
Vinay Bhaskara covers finance, operations and regulatory matters surrounding the U.S. and international airline industry. Bhaskara has been quoted in the Washington Post, Wall Street Journal and South China Morning Post, The LA Times, and his work has appeared in Forbes, Business Insider and Skift. You can contact him at firstname.lastname@example.org.
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