CRISIS IN THE AIRLINE INDUSTRY
If you are a reader of the business pages of the newspaper, you will have seen a number of articles about the crisis of the North American airline industry. The following details were published in the last few days.
- United Airlines and US Airlines are said to be close to a merger. United Airlines lost $537 million in the first quarter of this year. The company just emerged from bankruptcy protection in 2006. (G & M April 27, 2008)
- Continental Airlines was said to be part of this deal but they backed away. Continental lost $80 million in the first quarter of the year. (G & M April 27, 2008)
- Delta Air Lines Inc. announced earlier this month that it had agreed to buy Northwest Airlines Corp in a stock swap that created the world's largest carrier. (G & M April 27, 2008)
- The Star reported that another American company Eos Airlines has filed for Chapter 11 bankruptcy protection. (The Toronto Star, April 28, 2008)
“Every U.S. carrier, including Continental, is under enormous pressure from record high fuel prices, a slowing U.S. economy and a weak dollar,” Mr. Kellner (the Chairman and CEO of Continental) told employees. “In today's harsh environment, we must continue to adjust our business model to ensure we successfully navigate through these difficult times, so that in the future we can once again grow and prosper.” (G & M April 27, 2008)
So what is the financial picture with Porter Airlines? We do not know. Porter is a private company and is not required to report its financials. These are some things that we do know.
- Porter has to pay the record high fuel prices. The International Air Transport Association (IATA) calculates that airline fuel has increased 78% over the last year. The Q400 is 15% more fuel efficient than a 120 seat narrow bodied jet, but Porter is still paying 78% more for fuel than they were this time last year. http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm
- The fall in the US dollar means lower net cash to the company from American passengers.
- Porter continues to spend furiously on advertising in the hope of attracting more customers.
- We estimate that Porter is flying at about 50% occupancy.
- The FAA, the American federal airline regulator, has plans to reduce the number of Porter flights to Newark, N.J. from 7 a day to 5. Robert Deluce is quoted as saying: "We would have never started up service in New York if we had any indication that we would only have five flights...The schedule they're giving us...is not viable." (Toronto Star April 23, 2008)
- Airlines have a difficult time during economic recessions because travel, for many people, is a luxury and businesses cut back. Canada has yet to feel the full effects of the recession, but the Americans are having a very hard time, and it is expected that airline travel across North America will be down over the next year. Any economic downturn is bound to effect the Porter U.S. flights, and Porter's expansion plans are to American cities.
- Porter raised $125 million in start-up capital and spent about $100 million on its first four Q400 aircraft. Newspaper reports last summer had Porter looking for more capital to buy additional planes. The airline is operating six aircraft and six more have been ordered from Bombardier. By the time they are in service Porter will have to have a customer base to pay all of their costs. The original investors will be looking to get their money back with a handsome return.
A customer base has been established but is it enough to make Porter a successful company? We do not know with any certainty but an educated guess points to turbulent times ahead.
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