Robert Deluce, President and CEO of Porter Airlines, stated in a recent Globe and Mail article that there would likely be an IPO.  Although the timing wasn’t clear, his admission seemed a departure from his non-committal position in the past.  What are we to make of it?

First a little background.  An initial public offering (IPO) is the first sale of a company's common shares to public investors.  In Porter’s case it would mean a transition from its current private ownership to one in which anyone could buy shares on a publicly traded stock exchange.

While an IPO’s main purpose is to raise capital, there are at least three reasons why a company would go public.  First, it may want to upgrade its equipment or expand its business.  Second, it may want to use the money to pay off debt.  Thirdly, it may be looking at an exit strategy that pays a windfall for its founders. 

In Porter’s case, the company doesn’t need to upgrade its equipment.  As Mr. Deluce is fond of saying, Porter flies the state of the art Q400.  As for money for expansion, that hardly seems the case.  As late as March this year, the Canadian Press reported the CEO saying that Porter had a third party funding commitment from a financial institution for its next 12 planes. 

Porter doesn’t seem to need money to pay off debt.  Its filing with the U.S. Department of Transport for a U.S. licence showed that the company launched with $125 million in equity investment.  Mr. Deluce told the Globe at the end of August last year that Porter hadn’t yet burned through all its start-up cash.

The third reason for an IPO, an exit strategy that pays a windfall for its founders, seems most likely.  After all, Mr Deluce’s experience with Air Ontario and Canada 3000 followed a pattern of selling and getting out.  Certainly, Porter’s other founding shareholders, Borealis, GE Capital, Edgestone, are known for venture capital plays rather than operating airlines.  As for a windfall, if each dollar of the start-up $125 million bought one share and each share of the IPO was valued at $12.50, it’s easy to see why the original investors would want to exit.  However, what would the new shareholders be buying?

New shareholders would get Porter’s interest in a number of Q400s, probably the first four that were reportedly purchased outright, minus the obligation on any other planes, up to 12 if the IPO goes at the end of the year.  Then there is Porter’s interest in any airport improvements while the airport remains a going concern.  Finally, there is the goodwill and the cash flow from a growing business whose bottom line won’t be known until Porter is forced to open its books.

On the other hand, prospective shareholders may want to ask a few questions.

According to the Tripartite Agreement, the Q400 isn’t permitted at the island airport for two reasons: it isn’t a STOL aircraft; it violates noise limits.  What would the effect be on Porter should the City insist that the port authority and Transport Canada honour the Agreement and phase out the Q400?

When the port authority signed its Commercial Carrier Operating Agreement (CCOA) with Porter, the port authority severely limited Air Canada’s presence at the airport.  As a result, Air Canada has sued the port authority for greater access.  How would the suit affect Porter should Air Canada be successful?

According to the Tasse Report, the total turboprop movements, arrivals and departures (slots) are 120 a day.  The number of slots for Porter is even lower, limited by its CCOA with the port authority and the port authority’s commitment to allow a second carrier at the airport.  Given Porter’s limited number of slots, how big can Porter grow?

The port authority’s consultants, Sypher:Meuller, state that the island airport will be a niche airport serving less than 900,00 passengers a year.  Similarly, Fred Lazar, an associate professor of economics at Toronto's York University and Schulich School of Business, stated in a Business Edge interview that Porter will never amount to a major player in the airline industry.  Given these predictions of limited growth, how much should a share in Porter be worth?

This July, the U.S. Department of Transport will give a final ruling on its tentative approval to have Continental Airlines join with several airlines, including Air Canada, in a new alliance.  Continental, through its regional partner Colgan, currently has the ability and authority to operate Q400s from Newark to Toronto.  At least one website indicates that Continental will seek to use the island airport.  What will the effect on Porter be if it is faced with competition on the Toronto Island - Newark route?

Construction of a high-speed rail link from Union Station to Pearson is underway.  Once it is completed, what will the effect be on Porter’s business, especially the Toronto – Halifax route when passengers can take a jet rather than a turboprop non-stop without a refuelling in Ottawa?

Porter’s first chief financial officer left the company after one year.  His replacement also left after one year.  The Vice-President Operations, who has been with Porter from the outset, then filled the position.  Why didn’t Porter go outside the company for the third CFO in two years?

Given these significant factors, it will be interesting to see what the Porter shares will be initially set at.

Bob Kotyk