This morning’s Toronto Star has an interesting article on the continuing dispute between Robert Deluce, the founder and CEO of Porter Airlines, and Mayor David Miller. 

These are the mayor’s words quoted in the article: 

"Toronto's waterfront is a place for people to live, work and play and is not an appropriate place for a commercial airport,"...

"It is impossible to realize our (waterfront) vision and accomplish all we are working toward with multiple daily commercial flights in the vicinity."

Thank you, David Miller!  Those who love the Waterfront agree with your sentiments.

But the other thing that the article highlights is the mystery around Robert Deluce’s claim that Porter is profitable.  The Star reporter, Cathal Kelly, took a Porter flight to Chicago and back.  This comes from the article.

"The flight down deepens the mystery of Porter's purported profitability. Roughly 20 of the 70 seats are occupied. Nearly all are Porter employees or guests.

On the flight home, there are only eight passengers, all of them connected to Porter."

Deluce is quoted as saying "It takes six months for a route to find its legs." The Chicago route has been running since November.  Well, that is four months and still the flight both ways has no, or very few, paying passengers.  What is happening?

Porter Airlines is a private company and nothing has been revealed about their financial situation, but this is what we know.  Deluce received $20 million from the federal government settlement over the dispute about the bridge, and we can assume that he invested this money in the start up airline.  The company raised $115 million in equity funding from venture capitalists.  That is a lot of money for a start up.  (West Jet stared with $5 million.)

That is about all we know about the financial situation of Porter Airlines and the rest is speculation, but it is interesting speculation.  This is what I think is going on.

Porter purchased the first of the Q400 aircraft with the money raised and established routes to Ottawa, Montreal and Newark.  These are the most profitable airline routes in Canada and Porter was quickly able to make a profit.  Remember the $20 million comes from the government and the $115 million is in equity.  Porter does not have to pay this money back.  The only costs at this point were fuel and staff.  It is easy to make profit if the company does not have to pay the costs of borrowed money, and Deluce is probably right that the airline’s break even point under these conditions is the sale of about 30% of the seats.

But this is where it starts to get hard.  There is an old expression that says, businesses either expand or they die, and Robert Deluce is determined to expand Porter.  The company has another ten Q400 aircraft on order from Bombardier.  That money to pay for the planes will have to be raised through debt.  That means Porter will have payments to make on these loans, and the company must generate income to make those payments.  They can only do that by selling more seats.  By paying on the debt the break even point is probably pushed up to between 40% or 50% of the seats sold.

Deluce is quoted in the Star article that once they buy the additional aircraft, they plan “as many as 20 Porter destinations and a nearly threefold increase to 150 flights in and out of the island each day.”  In order to break even and pay all of their costs they will have to sell between 40% and 50% of the seats.  Can they do it? 

Can Porter generate enough business to pay all of their costs, including the payments they must make on the debt?  It does not look good.  We are in the midst of a nasty recession.  Other airlines report that air traffic is down substantially.  Porter has very few paying passengers on their flights to Chicago, and they have been flying this route for four months. 

Porter is already flying on the most profitable routes.  What is left?  The Q400 only has a range of about 1000 kilometers.  Chicago and Washington are about as far as the plane can fly without refueling.  Look at a map and draw a circle at a radius of 1000 kilometers from the Toronto Island Airport.  What major centers does it include?  Syracuse, Boston, Detroit, Philadelphia, Washington, Albany, Cleveland, Buffalo, Columbus, Cincinnati, Scranton, Baltimore, Sault Ste Marie, those are the cities that Porter must be planning to fly to.

The question of Porter’s profitability will come down to this.  Can the company sell between 40% and 50% of the seats on flights to these centers?  My own personal estimation is that they cannot do it.  They have milked the profitable runs, but it will be much more difficult to make a profit on the other routes.  How many people will want to fly to Syracuse, Albany, Cleveland, Buffalo, Columbus or Cincinnati? 

I hate to rain on Robert Deluce’s parade, but there are hard times ahead for Porter.

Bill Freeman