Aviation Week & Space Technology, Oct. 11, 2010, p. 56

Web headline: Airline Entrepreneur Strikes Gold With Toronto Airport

Downtown Bound

Scrappy startup turns sleepy Toronto airport into crown jewel—and puts Air Canada on the defensive

By Joseph C. Anselmo Toronto

"Are you the Herb Kelleher of Canada?"

Porter Airlines President/CEO Robert Deluce smiles at the question before he demurs. On the surface, the mild-mannered businessman and lifelong aviator bears little resemblance to the brash, chain-smoking lawyer who co-founded Southwest Airlines nearly four decades ago. "I've met Herb a few times and he's really quite remarkable," Deluce says with characteristic Canadian modesty. "I'm not in Herb Kelleher's category at all."

But dig a little deeper and some similarities emerge. Kelleher launched Southwest from a secondary airport, Dallas Love Field. Porter has transformed a sleepy island airport in the heart of downtown Toronto—Canada's prosperous center of finance—into a fast-growing gateway for business fliers. Southwest had to beat back lawsuits by incumbent airlines before it got off the ground in 1971; Porter has been sued five times, unsuccessfully, by Air Canada and its regional affiliate, Jazz. Both Southwest and Porter are based on low-cost business models—Porter can break even with its fleet of 20 Bombardier Q400 turboprops flying half full. Both have shaken up the status quo in their nation's airline industries. And Deluce, like Kelleher, is not afraid of a fight.

Porter Air's home base, Billy Bishop Toronto City Airport, is on an island in Lake Ontario just off downtown Toronto.

Credit: Porter Airlines

Since inaugurating service four years ago this month with a C$125-million ($121.7-million) investment from four private equity firms and a holding company led by Deluce, Porter has steadily chipped away at the dominance of Air Canada, Jazz and WestJet Airlines in the well-traveled Toronto-Montreal-Ottawa triangle. Starting with 10 round-trip flights a day between Toronto and Ottawa, Porter now serves 14 cities in eastern Canada and the U.S., including Newark, Boston and Chicago. The Toronto-Montreal route alone has 20 round-trip flights a day.

Deluce says the carrier is on pace to carry 1.65 million passengers this year and 1.9 million in 2011. And while Porter's owners opted to shelve a C$120-million initial public offering (IPO) in June after institutional investors balked at the share price, Deluce vows the airline is adequately funded and will turn its first full-year profit this year.

Making the situation even more painful for Air Canada is that it failed to recognize the potential of Billy Bishop Toronto City Airport, the diamond in the rough on Lake Ontario that has been so crucial to Porter's success. Perhaps it was the fact that jets are prohibited from flying into the circa 1939 field, a challenge Porter gets around by using Bombardier's fuel-efficient—and locally built—Q400 turboprops. Or maybe it was the local activists who have long wanted to turn the island into a waterfront park and blocked plans to link it to the mainland with a bridge (passengers must take a short ferry ride, though a pedestrian tunnel is planned).

"Air Canada was here for 16 years and during that time they 'grew' traffic from 400,000 passengers all the way down to 26,000 in their last 12 months of operating at this airport," Deluce says. "We carry that amount every 3-4 days." Air Canada declined to make executives available to comment for this article.

Porter bought the terminal at the downtown airport, unceremoniously booted Jazz in 2006—the impetus for some of those lawsuits—and constructed a new, C$50-million terminal that opened earlier this year, complete with a business-caliber lounge that offers amenities such as free Wi-Fi, snacks and newspapers. But it is Billy Bishop's prized location in the heart of Toronto that is the prime attraction for business travelers who want to avoid the 17-mi. slog through Los Angeles-like traffic to the city's main airport, Pearson International.

"Lots of startups have tried to play in the 'big triangle' in eastern Canada and have flamed out, largely because the incumbents have pounced on them," says Rick Erickson, a Canadian aviation consultant based in Calgary. "Porter was smart enough to negotiate almost exclusive access to that airport after Jazz had turned its back on it. Within a couple of miles is a very strong customer base—and certainly a high-yield one."

Porter has used Bombardier's Q400 turboprops to sidestep a prohibition against landing jets at Toronto's downtown airport.

Credit: Lorne Bridgeman

Indeed, Porter is no low-cost airline when it comes to fares. The carrier's philosophy is more about convenience, comfort and frequency. While its Q400s can be crammed with up to 80 seats, the airline opted to install just 70 leather seats in its one-class cabins, providing space for a 34-in. pitch and extra leg room. Flight attendants—outfitted in retro uniforms that have attracted notice on fashion blogs—offer free alcoholic beverages. Bombardier's innovative noise and vibration suppression system makes the Q400 cabin much quieter than one would expect on a turboprop aircraft. "Flying on it is very much like a business-class experience," says Cameron Doerksen, a Montreal-based aerospace analyst who frequently uses the airline.

"I don't think I've ever been associated with an airline that has had a stronger brand," says Don Carty, the chairman of Porter's board and a former chairman and CEO of American Airlines' parent company. The Toronto-born Carty, who began his career at Air Canada , helped Deluce raise money to launch Porter and even invested some of his own. "This has been a gleam in Bob's eye for many years," he says. (Carty also serves as chairman of Virgin America).

The 60-year-old Deluce has deep roots in aviation. He grew up in a family that owned and operated regional airlines, including Air Ontario, which was sold to Air Canada and became the foundation for Jazz. He learned to fly at the age of 16, ironically at the downtown Toronto airport. "If you were to cut off Robert's arm, aircraft fuel would come spilling out," says Erickson. Though Bombardier's Q400 assembly line is only a 30-min. drive to the north, Deluce has been known to show up in an alternate mode of transport. "I can fly there with my amphibious Cessna 185 in about four minutes," he says.

Documents filed for the airline's IPO show Porter's break-even load factor—the percentage of seats it must fill not to lose money—stood at an impressively low 49% in 2009. The problem is that only 47% of its seats were occupied that year. While Porter has not filed additional financial disclosures since the IPO was postponed in June, Deluce says the airline has turned the corner on profitability after losing more than $44 million in its capital-intensive startup years. "I don't think we'll ever be an airline that runs with an 80% load factor," he says. "But when you have a break-even load factor of less than 49%, if you're running in the 60s or even the high 50s you've got the highest profit margin of any airline in the world." The airline's load factor in September was 55.8%, up from 47.6% a year earlier.

Porter has ordered four more Q400s plus six additional options, which, if all exercised, would bring its fleet to 30 aircraft. The carrier's business plan envisions expansion to destinations that are within 800 mi. of the carrier's four main cities: Toronto, Ottawa, Montreal and Halifax, and if Deluce has his way Porter's Q400s will soon be landing in Washington, Philadelphia, Detroit, Cleveland, Pittsburgh and Cincinnati. Deluce says he sees no need to move beyond Q400s in the near term, but a model of a Bombardier CSeries jet, in a Porter livery, sits on the shelf in his modest office at the airport. "It's obviously just a model, but it's something to look at from time to time," he answers coyly when asked about it. "You always have to be planning down the road, though I'm not saying that is where we're heading."

It remains an open question whether Porter will grow enough to be more than an irritant to Air Canada. While Erickson gives Deluce credit for being creative, he sees big barriers to growth outside of the Toronto market, where Porter has the built-in advantage of the downtown airport. "The model works in Toronto, but I don't think there's much room" to grow elsewhere, he says. "WestJet and Air Canada would come down on them like a ton of bricks in western Canada."

But Carty isn't so sure. While the strength of Porter's system clearly will hinge on the Toronto airport "for some time to come," he says the airline could branch out if it gains enough mass. "In the early days, when people thought about Southwest, they thought about Love Field."

A recent award of new slots at Billy Bishop airport provides Porter more room to expand. But it also ends the carrier's four-year monopoly at the downtown facility by giving a small number of slots to Air Canada and Continental Airlines (see p. 59). Deluce professes to view the new competition as vindication. "If they both come in here—and there's no reason to think they won't—it will be more exposure for Porter," he says.

But its U.S. expansion plans could be slowed because the downtown Toronto airport does not have a checkpoint that allows fliers to "pre-clear" U.S. customs before they depart Canada, allowing them to fly to any U.S. airport hassle free. Pearson and other major Canadian airports have such set-ups, but for now Porter is limited to flying to U.S. airports that have customs and immigration checkpoints. And Porter's passengers are dumped into the same immigration queue as all other non-U.S. travelers, an ordeal that can take 2 hr. on a busy day—a hard sell to a business traveler. Though his initial request for such a facility was rebuffed by the U.S. due to a lack of resources, Deluce remains confident the downtown airport will eventually get a pre-clearance station as traffic grows.

Meanwhile, the battle with Air Canada has become personal. Last year, Air Canada revoked a pass for free first-class travel for Deluce and his wife. Deluce, who acquired the pass when Air Canada bought Air Ontario from him in the 1980s, responded by filing a breach of contract suit. "I think it's just part and parcel of a series of tactical moves on their part that are designed to throw Porter off its game," he says.

"Air Canada offers an alternative to some locations we don't fly to," he adds, explaining why he wants his travel pass back. "They're not the worst airline in the world. I've been to places in Nigeria that have airlines that are way worse than Air Canada."

So would Porter sell out to a larger airline such as Air Canada for the right price? "We've never considered that," Deluce says. "I think there are other ways of raising equity."

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