Porter Airlines made the print and online press recently.  The Toronto Star carried a business article on Feb. 1 titled ‘Porter tries to fly above economic turbulence’.  On Feb. 4, online magazine Airline Business carried an article titled, ‘Porter's growth plans eye US, Ontario cities, more frequencies’.  A third article, a blog entry on Flightglobal, an online publication that covers the airline industry, posted ‘Porter probably placing more Q400 orders’.  The flurry of coverage is interesting for the various takes on a single story.

The Feb. 1 Star interview had Porter pushing ahead with expansion plans, taking delivery of 10 more Q 400s and adding five new destinations.  The Feb. 4 interview repeated the claim of 10 more planes for a total of 18 and named three U.S. cities targeted as destinations: Boston, Philadelphia and Washington.  The Feb. 5 article, rather than an interview, was a report of a presentation that Porter’s CEO Robert Deluce made at a New York City conference for investors interested in growth airlines. 

The last article is the most puzzling.  It reports some of Mr. Deluce’s statements that he made in his presentation.  One quote, “..."probably I shouldn't say this because there are Bombardier people here today, but we may be placing an order for more. Some discussions will have to take place first", seems to make the expansion claims reported in the interviews sound tentative.  The article ends by saying that the author is not sure why Mr. Deluce was at the conference since it was for investors and he did not address any possibility of taking Porter through an initial public offering (IPO).

A Porter IPO would certainly fit a Deluce pattern of starting an airline and selling it.  Air Canada had an ownership interest in the Deluce family’s Air Ontario, a family operation in the 80’s and 90’s until the Deluce family sold their shares to Air Canada.  Similarly, Robert Deluce was president and CEO of Canada 3000 from 1988 to 1995 then sold his interest.

However, an IPO at this time seems unlikely.  While Porter’s venture capital partners, which include EdgeStone Capital Partners, Borealis Infrastructure Management Inc. and Dancap Private Equity Inc., might like nothing better than to cash in on their investment, the market may have other thoughts.  First, there is the economy.  With the Bank of Canada calling for a recovery not until 2010 and current credit tight, an IPO seems unlikely in the near future.  Indeed, as late as Feb. 10, the Globe business pages carried an article citing the lack of interest on the TSX for IPOs.  If not an immediate IPO, what does the future hold for Porter? 

Three scenarios are possible: status quo, expansion, winding down.

Mr. Deluce’s claims in one interview that overall bookings are strong, short-term business bookings are holding up reasonably well, and New York service is bouncing back and continuing to grow after last year’s Wall Street crisis.  In the other interview, Mr. Deluce notes that Porter paid out profit-sharing to its employees for its fiscal first quarter and that some flights enjoy an 80% load facto.  Those claims and his insistence on expansion with more planes and new destinations make the status quo unlikely.

Another reason that the status quo is unlikely is the passenger numbers.  Toronto Port Authority officials claim that between 45,000 and 50,000 passengers use the airport each month.  This translates to between 540,000 and 600,000 passengers going through the airport annually. 

In 1987, the number of passengers peaked at 400,000 or about 11% of the Metropolitan Toronto population (3,600,000) at the time.  The 2006 census had the population at approximately 5,113,000.  Eleven percent of the 2006 population is about 562,000, a number somewhere between the port authority officials 540,000 and 600,000 annual passenger count.  It may just be that the airport has reached a natural saturation point given the population base it has to draw from.  Stagnant numbers would militate against the status quo. 

Another interesting parallel is the places Porter flies to.  Three of the busiest destinations offered by City Express and Air Ontario in 1987, Ottawa, Montreal and New Jersey, are currently on offer from Porter.  However, in Porter’s attempt to expand from that base, Halifax, Quebec City, Mt. Tremblant and Chicago have been added, with Chicago as the only full-time regularly scheduled service amongst the four destinations.  If all current destinations can produce no more than 600,000 passengers annually, Porter may have no choice but to expand, especially with current load factor estimates.

Based on Porter’s January schedules, the airline had a 103,040-passenger capacity for a 28-day month.  With a port authority estimated 45,000 to 50,000 passengers over a 31-day month, the load factor works out to somewhere between 43% and 48%.  In July 2007, Mr. Deluce was quoted in the Globe as saying that a 35.7% load factor was the breakeven point.  With a profit margin somewhere between 7.3% and 12.3%, greater loads through expansion are another reason for more planes and destinations.

The second scenario, expansion, is not without its pitfalls.  It means taking on more debt and being able to service it in the middle of a drawn-out economic downturn.  It also means being able to withstand the competition.

Porter’s reported start-up capital in 2006 was around $126 million.  According to news reports, Porter’s initial four planes were purchased for about $100 million.  The rest presumably went for start-up costs. 

On July 25, 2007, a year later, the Globe and Mail reported that Porter was looking for $150 million for another six planes.  Four of those planes have been delivered with a small equity portion coming from existing cash flow.  That means Porter will need to finance a further eight planes with a price tag now at $30 million a pop. 

With the current tight credit markets, it will be interesting to see who comes forward with $240 million.  It will also be interesting to see how much can be squeezed out of existing cash flow during this recession.  Start-up costs in U.S. dollars for New York and Chicago are bound to be high, debt payments on the amount borrowed in 2007 for those other six planes and current operating costs are bound to take their toll on the 7.3% to 12.3% margins.

The competition, which was always against Porter, is heating up.  In July last year, Continental applied to the U.S. Federal Aviation Authority for exemption from anti-trust legislation.  If granted, Continental would be joined in an alliance with Air Canada that would allow for code sharing.  The effect would be to give Continental’s Q 400s access to the island airport for its Newark – Toronto flights.  Porter filed its objections with the FAA on December 10 but the FAA has still to rule.

The final scenario, winding down operations, is not open for discussion.  Although current economic conditions make the airline business very difficult – WestJet reported a $34.6 drop in profit for the fourth quarter – it would be foolish to speculate on Porter`s demise. 

Bob Kotyk